Weekly Market Wrap | 24 June 2023

#PowellTestimony #UKInflationShock #AlibabaCEO

Powell testifies before the House Financial Services Committee 

Unemployment Rate in The USA (Source: TRADINGECONOMICS.COM)

What Happened?

Federal Reserve Chair Jerome Powell testified before the House Financial Services Committee, providing his semiannual report to Congress. Following the central bank’s recent pause in its aggressive rate-hiking campaign, Powell emphasized that the Fed is not finished combating inflation. He indicated that the central bank might raise interest rates twice more this year, citing ongoing inflationary pressures.

Why did it happen?

Powell’s testimony reflected the current economic landscape and the Federal Reserve’s stance on key issues. Powell’s hawkish view on inflation and the possibility of further rate hikes underscored the central bank’s commitment to addressing the rising price levels. 

Democrats’ emphasis on the employment mandate highlighted their concerns about potential job losses resulting from aggressive rate increases. Republican questions regarding banking regulation were prompted by recent bank failures, although Powell indicated that tougher regulations on small banks are unlikely at this time.

What does it mean for the investors?

The indication of possible rate hikes suggests that the central bank remains focused on combating inflation, which could have implications for borrowing costs and investment decisions. The remarks regarding banking regulation indicate a likelihood of stricter rules for larger banks, potentially affecting their operations and profitability. These developments contribute to market uncertainty, influencing investor sentiment and potentially leading to fluctuations in asset prices.

UK inflation level remains higher than expected

UK Inflation level (Source: TRADINGECONOMICS.COM)

UK inflation has remained higher than expected for the fourth consecutive month, leading to expectations of further interest rate hikes. In May, inflation stood at 8.7%, driven by increased prices for flights, second-hand cars, and supermarket food. The shock in the inflation data led to the Bank of England raising the rates by 25 basis points more than anticipated.

The UK’s inflation stands out compared to other countries like the US and Germany, where inflation is decreasing. Despite wages rising at their fastest rate in 20 years (excluding the pandemic), they still lag behind inflation.

The high inflation rate, four times above the Bank of England’s 2% target, has led to a series of interest rate increases since the end of 2021. This makes borrowing more expensive, potentially encouraging reduced borrowing and spending, which could alleviate price increases. Homeowners, including first-time buyers, face challenges as fixed-term mortgage deals expire and lending conditions become stricter.

The Institute for Fiscal Studies (IFS) warned that higher interest rates could reduce disposable income by over 20% for 1.4 million mortgage holders. Karen Ward, a member of Chancellor Jeremy Hunt’s economic advisory council, called for more assertive rate rises to create a recession and curb escalating prices.

Alibaba CEO and Chairman steps down

Alibaba Share Price Chart (Source: Google Finance)

Alibaba Group announced on Tuesday that its CEO and chairman, Daniel Zhang, will step down from his roles to focus on the company’s cloud division. This move comes as Alibaba proceeds with its plan to divide into six separate business units. Zhang had been serving in three roles simultaneously since December, when he took charge of the cloud unit after a major-scale outage. 

Eddie Yongming Wu, chairman of Alibaba’s Taobao and Tmall Group, will take over as CEO, while Executive Vice Chairman Joseph Tsai will assume the role of chairman effective from September 10. The decision to appoint Zhang to concentrate on the cloud division is seen as a demonstration of confidence and trust in his ability to lead this vital business during the era of generative artificial intelligence (AI).

Zhang emphasized the need for clear separation between the board and management team as the Cloud Intelligence Group moves toward becoming an independent public company. Analysts estimate the cloud unit to be worth $41 billion to $60 billion, but its extensive data oversight could attract regulatory attention at home and abroad.

This unexpected reshuffle follows a challenging period for Alibaba, marked by increased regulatory scrutiny. In March, the company announced its restructuring into six units with separate boards and CEOs. While Alibaba’s China-facing e-commerce division will remain wholly owned, the other five units will be spun off, with the cloud unit expected to be publicly listed within a year.

IndexLevel1 Week1 MonthFrom Jan 1 2023
S&P 500 (US Stocks)4,348-2.09%+5.66%+13.71%
Nasdaq 100 (US Tech Stocks)14,891-2.50%+9.46%+37.09%
CSI-300 (Chinese Stocks)3,864-0.20%+0.13%-0.61%
Bitcoin (in USD)30,753+14.59%+16.78%+85.20%

Source: Google Finance, Bloomberg, Yahoo Finance, CNBC, Financial Times, Reuters, Business Times, CNN

Featured Image Source: DNA India

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