Banking runs and stickier inflation have led to constant reassessment of Central Bank action and terminal rates, coupling this with fragile sentiment meant that stock markets ended Q1 in the black but only just, US markets fared the best, big tech in particular. However, major economies are still not in recession, so commentary turned to stagflation.

The Fed hiked as expected although at the recent FOMC meeting their statement dropped the reference to ‘ongoing rate hikes’ replaced by ‘some additional policy firming may be appropriate’. The recent problems in specific parts of the US banking system are likely to lead to a tightening of credit conditions and spread widening will certainly add to the cost of bank funding. US banks have $620Bn of unrealised losses on their books which they can handle but continued deposit flight is worrying. Allowing money market funds continued access to the O/N Reverse Repo facility has accelerated the bank deposit shift, with nearly 100 counterparties regularly taking more than $2Tn at the Fed’s ONRRP. The raising of the US debt ceiling has not been in the headlines but has not gone away so we look forward to the usual round of shenanigans and the widening of US Sovereign CDS to 54, a level not seen since the PIIGS blew up, and evidence of worries regarding a technical default. US Commercial Real Estate has been having a particularly tough time as values are falling and a third of associated debt needs to be refinanced by 2025.

The ECB is likely to continue to raise the cost of borrowing but probably at a slower pace. Even though their headline inflation has dropped back sharply, core inflation continues to rise and has not yet peaked. Those who hoped for a year end reduction in rates are likely to be disappointed.

Sterling however had a decent month, appreciating 3% against the dollar. The UK economy has defied the worst forecasts, including the Bank of England’s, and while not off to the races, recent GDP numbers were much better than expected. We still are in line for another 25bp in May as core inflation remains stubbornly high. The Bank called on pension funds to stress test their LDI strategies to withstand bigger market shocks, no bad thing if you think back to last October.

Credit spreads were fairly volatile, Sterling spreads breaching 2% to then rally back to 1.9% which is around where they started the year. The primary market saw issuance despite the volatility and some decent yields printed.

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