The Cambridge Weekly – 13th March 2023

The Cambridge Weekly – 13th March 2023

Market wrestling

For weeks we have been talking of an equity market that is relatively expensive in comparison to bond markets, especially government bond markets. Below is a chart which tracks the dividend yield of the FTSE 100 (calculated from 12-month trailing dividends), together with the market-estimated real return (after inflation has been subtracted) of the 10-year gilt calculated by the BoE. It is reasonable to think of dividend yields as an inflation-adjusted (or real) yield, given that companies pay dividends out of profits which are made after inflation-affected input costs.

Central bank watch: March rate hikes await

Despite the flare-up of worries regarding smaller tech-focused US financials from Silicon Valley, spring rate rises are on the cards this month. Over the next 14 days, the European Central Bank (ECB), the US Federal Reserve (Fed) and the Bank of England (BoE) have their respective rate setting meetings. In Asia, the Bank of Japan (BoJ) convened on Friday 10th March, for what was Haruhiko Kuroda’s last outing as governor. Perhaps because it was more of a ceremonial meeting, it was brief, and no change resulted. Interestingly though, despite recent expectations of removing the yield curve control policy (to do so would be a form of tightening), the BoJ statement pointed towards signs of growth weakness. That makes it the outlier of the group.