One and Done From the Fed?

Global Economic and Capital Market

A review of the week’s top global economic and capital markets news.


As of noon on Friday, global equities were higher on the week amid solid early Q1 earnings reports. The yield on the US 10-year note rose to 3.51% from 3.28% on Thursday of last week while the price of a barrel of West Texas Intermediate crude oil added $2.50 to reach $83.Volatility, as measured by the Cboe Volatility Index (VIX), fell to 17.5, the lowest level since December 2021.


Fed forecasts mild recession


Central banks rarely explicitly forecast recessions, but the US Federal Reserve staff just did, according to the minutes, released this week, of the March FOMC meeting, which posited that fallout from the banking crisis will be the catalyst for a recession this year. The banking crisis unfolded less than two weeks before the meeting, which prompted many policymakers to shift their views on rates. Several argued for a pause at the March meeting due to the uncertainty created by the bank failures while others who had previously backed a 50-basis-point hike coalesced around a 25 bps increase, a stance the voters ultimately unanimously adopted. Officials indicated they will closely monitor the tightening of credit conditions. The more credit tightens, the less the Fed will need to hike rates. Markets currently expect that the central bank will pause after one more quarter-point hike at its policy setting meeting in early May.


March US inflation data mixed


At the headline level, consumer prices in the US slipped to 5% in March from 6% in February as the huge jump in prices in March 2022, the early days of Russia’s invasion of Ukraine, dropped out of the data. However, core inflation rose to 5.6% from 5.5% while core services excluding shelter, a measure the Fed watches closely, remained elevated, rising 5.7% from a year ago. While progress continues to be made on consumer prices, it’s not being made quickly enough for the Fed. On Friday morning, one-year inflation expectations from the University of Michigan survey, another measure closely watched by the central bank, jumped to 4.6% in April from 3.6% in March. One inflation bright spot was the news on Thursday that in March producer prices declined from the month before.


IMF lowers global growth outlook


In preparation for its spring meetings in Washington this Week, the International Monetary Fund updated its World Economic Outlook. The global growth outlook was downgraded 0.1% to a sluggish 2.8% in 2023 but is expected to improve modestly to 3% in 2024, though the risks to the outlook are heavily tilted to the downside, according to Pierre-Olivier Gourinchas, the IMF’s chief economist. Global inflation is expected to moderate from 8.7% in 2022 to 7% in 2023, though core inflation is expected to remain sticky, he said. Countries should continue to fight inflation as long as financial stresses remain contained and to safeguard financial stability should begin by using macroprudential tools rather than monetary policy. Additionally, many countries should tighten fiscal policy to ease inflation, restore debt sustainability and rebuild fiscal buffers.


March US retail sales fell 


US retail sales declined a more-than-expected 1% month over month in March while core sales, which exclude items such as food services, automobiles, gasoline and building materials, declined 0.3%, better than the forecast for a 0.5% decline. Falling gasoline prices were responsible for the bulk of the decline, but oil prices have rebounded of late, auguring higher gas prices ahead. February sales were revised up to -0.2% from -0.4%. Industrial production, led by mining and utilities, rose 0.4% in March while capacity utilization increased to 79.8% from 79.1%. Factory output declined 0.5% on the month.


The German government has rejected calls to extend the operating life of its three remaining nuclear power plants. A spokesperson for German Chancellor Olaf Scholz said the phaseout by 15 April is a “done deal.”


Emergency borrowing from the Fed dropped for a third week as banks borrowed a combined $311.7 billion from three liquidity programs, down from a peak of $343.7 billion in the immediate aftermath of collapse of Silicon Valley Bank and Signature Bank. 


Bloomberg estimates as much as $1.5 trillion of commercial real estate debt will come due by the end of 2025 amid downward pressure on valuations.


The Wall Street Journal reported this week that US construction spending related to manufacturing reached $108 billion in 2022, Census Bureau data show, the highest annual total on record.


The White House is planning some of the most stringent auto pollution limits in the world to ensure that electric vehicles make up the majority of new passenger vehicle sales by 2032.


New Bank of Japan Governor Kazuo Ueda said that it is appropriate to keep the central bank’s superloose monetary policies in place for now.


The Bank of Canada and the Bank of Korea each kept rates unchanged at policy setting meetings this week. Canada’s policy rate is 4.5% while Korea’s is 3.5%.


US Secretary of the Treasury Janet Yellen said this week that the US economy is performing “exceptionally well” and that she is not expecting a downturn.


The US budget deficit for March nearly doubled from year-ago levels, rising to $378 billion from $193 billion. That brings the fiscal year-to-date deficit to $1.1 trillion, up 65% over the same period a year ago.


US President Joe Biden marked the 25th anniversary of the Good Friday Agreement in Belfast, Northern Ireland on Wednesday, saying that “peace and economic opportunity go together.“


French President Emmanuel Macron clarified comments on China’s policy toward Taiwan, saying that France’s policy of supporting the status quo One China policy has not changed. Macron earlier in the week said Europe should not allow itself to be dragged by the United States into a conflict with China over Taiwan.


Amid the lowest crude oil stockpile in nearly 40 years, the Biden administration plans to refill the US Strategic Petroleum Reserve soon, US Energy Secretary Jennifer Granholm said on Wednesday.


Amid unresolved debt ceiling negotiations, the cost of insuring against a default on US government debt rose to 0.47% on Friday, the highest level in more than a decade. For context, credit default swaps cost 0.84% during the depths of the global financial crisis and 0.62% in 2011 after a debt-ceiling standoff cost the US its AAA credit rating from Standard and Poor’s.


Credit and debit card spending slowed to its smallest pace in more than two years, according to data from Bank of America.


Economist Megan Greene was appointed to the Bank of England’s Monetary Policy Committee as an external member for a three-year term beginning on 5 July. 


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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research,


This content is directed at investment professionals only.  

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