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Another US Rate Rise

9 May 2023

In the face of US banking concerns Jay Powell, Chairman of the Federal Reserve, yesterday announced a further 0.25% increase in interest rates whilst acknowledging the likely impact on jobs and growth. He did, however, announce a wait and see approach to further rate rises.

Whilst Quantitative Easing was entirely necessary to combat the effects of the 2009/10 financial crisis it was left to run for far too long and, in future years, will probably be seen as underpinning the inflationary surge that was sparked by the pandemic aftermath and the Ukraine war. The danger now is that those same Central Banks swing too far the other way, raising interest rates too much whilst, at the same time, continuing their recent programme of Quantitative tightening. We must hope Powell and his Fed pals are as good as his word because waiting and seeing should provide them with sufficient evidence that enough is enough.

In the UK the inflation rate is a bit stickier. The striking public sector needs to be more realistic with some of its wage demands and food producers and retailers need to stop topping up price increases. As we have said before, UK inflation will start to fall more noticeably and when this happens incidences of both the above should start to be tempered.

In the UK, the inflation rate remains stubbornly high. The wage demands of the striking public sector, if not tempered, will exacerbate this. Food producers and retailers current profiteering is also not helping inflationary pressures. This is a highly competitive field with constant undercutting, so I do not see this being a long-term issue. As we have said previously, UK inflation will start to fall as the energy prices rebase which will create some remedy to the above issues.

The US banking sector is still showing tremors after the SVB/First Republic quake with JP Morgan buying embattled First Republic bank early this week. This may hold equity markets in a tight range for a while yet, with the approach of the holiday season not helping. Coupled with the Sell in May and go away adage. This should, however, provide a bit more time to dribble funds into the market – we still feel the next major move will be upwards.

Eli Lilly (LLY)

One share worth looking at is Eli Lilly, the large US pharmaceutical company. The company announced yesterday that its experimental drug for Alzheimer’s slowed the progress of the disease in a final stage trial, meaning the company can now apply to the FDA for approval. The company has also been successful to date with their weight loss drug, Tirzepatide. They have been granted fast designation for the treatment of adults with obesity or overweight with weight-related comorbidities. All being well, this initially will be for a selective audience but in time, could be far wider reaching. Both drugs have huge potential which interest us. Management is held in high regard and the bolt on acquisitions over the years have been sensible. Shares trade on the New York Stock Exchange at c. $430 a share.

Neil Morss

Chartered FCSI