In macro-economic terms, there were no major surprises in the budget. There was an upward revision to short-term GDP forecasts with the OBR no longer forecasting a technical recession, although GDP is still forecast to shrink slightly in 2023. The longer-term growth forecasts were lowered which maintained high debt levels and little room for fiscal manoeuvre. The budget was overshadowed by fresh turmoil in financial markets and heavy losses in the banking sector. The FTSE 100 index came under heavy pressure with a slide of close to 4.0% on the day. The slide in financial equities undermined expectations of a Bank of England rate hike next week with risk fears also undermining support.
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After a brief respite on Tuesday, financial-sector fears returned with a vengeance on Wednesday and the main focus switched to Europe. After the open, Credit Suisse announced that the Saudi National Bank would not be increasing its stake in the troubled bank. The news triggered fresh fears over the outlook for the bank, especially given a potential contagion effect from SVB. There was a fresh slump in its share price and a wider contagion effect with European banks under heavy pressure. There was also a sharp re-pricing of ECB interest rate expectations with markets considering that the chances of a 50 basis-point rate hike had dipped to around 20%. ECB council member Constancio also commented that the bank should hike rates by a maximum of 25 basis points this week. The combination of Credit Suisse fears and ECB repricing triggered heavy selling pressure on the Euro.
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13.15 ECB Interest Rate Decision Exp. 3.5% Curr. 3%
13.15 ECB Monetary Policy Decision Statement
US retail sales declined 0.4% for February and in line with consensus forecasts after a revised 3.2% jump previously. Underlying sales also met expectations with a 0.1% decline while the control group recorded a 0.5% gain. The New York Empire manufacturing index dipped sharply to -24.6 for March from -5.8 previously and much weaker than consensus forecasts of -8. There were also notably negative readings for new orders and production. Employment continued to decline on the month and there was a limited easing of inflation pressures. Companies were less confident in the outlook and inflation pressures are expected to decline more substantially.
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