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Please see below, an article from Evelyn Partners discussing the recent Monetary Policy Committee interest rate decision and the implications for markets and the economy. Received yesterday evening – 03/08/2023

What happened?

The Bank of England delivered on the expectations of economists and markets with an increase of 25bps to the base rate at their meeting today. This represents the Bank’s 14th consecutive increase and takes the base rate to 5.25%, its highest in 15 years.  The committee was split 3 ways on the vote, with 1-6-2 members voting for 0-25-50bps increases respectively. 

What does it mean?

Today’s decision by the Bank of England was always likely to be close, if markets are our guide. Prior to the meeting, Overnight Index Swap markets had priced around a 1/3 chance that the Bank would go further and increase by 50bps.  In the end the MPC’s hawks, who would have preferred such a move, were outvoted by the majority, including governor Andrew Bailey.

A key reason the bank will have decided against the larger increase will have been June’s inflation numbers, which finally revealed a downside surprise in headline inflation and, perhaps more importantly, the core (excluding volatile food and energy) print.  The core figure came in at 6.9%, which will still high, was lower than July’s figure of 7.1%.  The expectation is for inflation to continue to fall as lower energy prices continue to feed through to the bottom lines of balance sheets, both for businesses and individuals.  This was reflected in the MPC’s own inflation forecasts, which fell from 5.1% to 4.9% in the fourth quarter of this year, although this was allied with an increase in its inflation expectations over the medium term.

The monetary policy report also included growth forecasts, which continued to make for pretty bleak reading, revealing a cut to forecasts to 0.5% per year for 2023 and 2024.  On the upside, the Bank agrees with the consensus of economists in no longer forecasting a recession in the UK, but it does highlight the risk of one in 2024 and early 2025. 

Previous guidance in the minutes released today was maintained: “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required,”. There was an Important addition about rates being “sufficiently restrictive for sufficiently long” for inflation to get back to the Bank’s 2% target.  That implies that interest rate cuts are perhaps further away than some had imagined. 

The Bank provided no clues to the market today on its plans for reducing the size of its balance sheet, saying it will lay out these plans at its next meeting in September. 

Bottom Line

Reaction to today’s 25bps increase by markets was dovish, as expectations of where rates will peak moved slightly lower, from 5.85% before the meeting to 5.75% afterwards, at the end of this year or beginning of next.  This will be welcomed by mortgage holders, in the hope that increasing rate expectations may have peaked, along with the cost of mortgage deals in the market. The yield on the 10 year government gilt remained broadly unchanged on the announcement and looks attractive in our view, at 4.4%, as the Bank gets closer to the top.

Please continue to check our blog content for advice and planning news from us and leading investment management houses.

Alex Kitteringham

4^th August 2023

Please see the below article from Brooks Macdonald providing their commentary on global markets. Received this morning – 03/08/2023.

What has happened

Equities fell sharply yesterday as concerns around the US debt downgrade focused investor attention on the funding needs of the US government. The US equity market fell by over 1%, recording its worst daily return since April of this year.

US debt financing

Concerns over the quantity of US Treasury issuance over the coming months filtered through risk assets yesterday with the near-term borrowing needs being formalised yesterday. Adding concern was the comment from the Treasury that this increase in borrowing was likely to continue, saying that ‘further gradual increases will likely be necessary in future quarters.’ Treasury issuance raises yields as the price adjusts for additional supply. At the same time, this issuance draws liquidity from other areas of the market (such as equities and corporate bonds), decreasing the prices of risk assets. All of this puts the US budget deficit back into the spotlight with the Fitch downgrade effectively just highlighting the funding concerns, recent political impasses and ongoing fiscal spending.

UK

Today the market’s focus will switch to the Bank of England which is unveiling its latest policy change at midday. The consensus expects a 25bp interest rate hike, with economists reducing the chance of a 50bp move given the downside miss to UK CPI last month. The market is only now apportioning around a quarter chance of a 50bp move after it being the most likely outcome a few weeks ago. The political pressure continues in the interim with Prime Minister Sunak saying that inflation was not falling as fast as he would like and stressing the policy importance of a further reduction in price pressure.

What does Brooks Macdonald think

The shift in market expectations towards a 25bp hike at today’s meeting does not mean that the UK will have necessarily reached its peak interest rate after the move. The market is expecting the Bank of England to need to raise interest rates further over the coming months to guide inflation lower. A strong UK labour market is a particular concern to the Bank of England, therefore one should expect the central bank to continue with their hawkish rhetoric alongside the smaller hike.

Bloomberg as at 03/08/2023. TR denotes Net Total Return

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

03/08/2023

Please see below, the ‘Daily Update’ from EPIC Investment Partners for a brief analysis of the key news from markets and economies across the world. Received today – 28/07/2023

Earlier this week, we heard that eurozone banks reported a sharp fall in corporate loan demand, which has fallen to its lowest level on record (since the survey started in 2003). The ECB’s quarterly survey of banks also showed a striking fall in household loan demand and tightening financial conditions, which highlight the impact increasing borrowing costs have had on the eurozone economy. Despite this, the ECB continued on its tightening path, with inflation being the main priority.

As was well priced in, the ECB increased rates by 25bps, to 3.75% on the deposit rate, and left the door open for further hikes. In a statement, the central bank noted that although inflation has been declining, it will likely remain “too high for too long”. Headline eurozone inflation fell to 5.5% in June, from 6.1% previously, however, remains way above the 2% target. There was no forward guidance given, the ECB will maintain its data dependence approach in “determining the appropriate level and duration of restriction”. The statement also highlighted the effects of past tightening as increasingly dampening demand across the region.

In a surprise move, the ECB “set the remuneration of minimum reserves at 0%,” to ensure “the full pass-through of interest rate decisions to money markets”. Adding that “it will improve the efficiency of monetary policy by reducing the overall amount of interest that needs to be paid on reserves in order to implement the appropriate stance.”

Later, ECB President Lagarde repeated: “We want to break the back of inflation”. She also reiterated the data dependence approach, adding that the ECB is unlikely to give forward guidance. She said the ECB has an “open mind” going into the September meeting, adding “We might hike, we might hold.” She came across slightly dovish as she discussed the bloc’s economic outlook and the changing drivers of inflation; namely wage growth and profit margins.

As with the Fed, the ECB’s next meeting is in September, which will allow it a natural pause and lots of data to plan its next steps. Unlike the US, however, inflation in the eurozone is falling much slower, with some calling for a 2% target to be hit at the earliest in 2025. Moreover, the economy is not holding up as well; business activity (measured by the S&P Global PMIs) shrank more than expected, with only services in expansion in July. Prelim. S&P Global PMI readings in key economies (e.g., France) are well in contraction, and the manufacturing gauge in Germany fell to 38.8, with the composite reading dropping into contraction.

The eurozone’s official Q2’23 growth and inflation figures are due on Monday, expected at 0.1%qoq and 5.2%yoy (prelim. for July), respectively. Earlier this week, the IMF said it expected the eurozone could grow by 0.9% this year. However, this factors in a recession in Germany, where the GDP is expected to contract by 0.3%. The Fund noted that Italy will grow at a faster rate than the bloc’s two largest economies, Germany and France.

Lastly, it would be remiss of us to not highlight the new Governor of the BoJ, Kazuo Ueda’s surprise tweak to yield curve control (YCC) flexibility. The central bank will allow 10-year benchmark yields to have a 50bp tolerance, as reference points rather than “rigid limits”. Thus, the central bank will buy the 10-year at 1% each day instead of 0.5%. The BoJ upgraded its forecasts for inflation for this year, to 2.5% (from 1.8%), then falling to 1.9% (from 2%). Having held short-term interest rates at -0.1%, Japan is the only country left with negative interest rates.

Please continue to check our blog content for advice and planning news from us and leading investment management houses.

Alex Kitteringham

28^th July 2023

Please see the below article from Brewin Dolphin commenting on the latest stock market movements. Received late yesterday 25/07/2023.

Stocks rise as UK inflation eases

Most US and European indices rose last week as slowing inflation raised hopes that interest rate hikes could be nearing an end.

The FTSE 100 surged 3.5% as UK inflation eased more than expected, triggering a decline in the pound versus the dollar (around 70% of FTSE 100 company revenues come from overseas). The Stoxx 600 and Germany’s Dax climbed 1.6% and 0.7%, respectively, after two hawkish European central bankers appeared to moderate their stance on future rate hikes.

In the US, the Dow enjoyed its tenth consecutive day of gains on Friday – its longest winning streak since August 2017. The Dow ended the week up 1.9%, boosted by comments from Treasury secretary Janet Yellen that the risk of a US recession had fallen. Disappointing technology sector earnings weighed on the Nasdaq, which lost 1.5%. In Asia, the Shanghai Composite and the Hang Seng fell 1.3% and 1.7%, respectively, after figures showed China’s gross domestic product (GDP) grew by just 0.8% in the second quarter, down from the first quarter’s 2.2% expansion.

Investors shrug off weak PMIs

Stocks made small gains on Monday (24 July) as investors digested the latest purchasing managers’ indices (PMIs) for the US, eurozone and UK. The Dow extended its winning streak, advancing 0.5%, while the S&P 500 and the Nasdaq gained 0.4% and 0.2%, respectively. S&P Global’s flash PMI for the US showed business activity slowed to a five-month low in July, dragged down by weaker services sector growth. Manufacturing remained in contraction territory, but rose from 46.3 in June to a forecast-beating 49.0 in July (a reading below 50.0 indicates a contraction).

The Stoxx 600 and the FTSE 100 managed to shrug off weak PMIs to edge up 0.1% and 0.2%, respectively, on Monday. S&P Global’s flash PMI for the eurozone showed business output fell at the fastest rate for eight months in July. The services sub-index fell to 51.1, its lowest in six months, while the manufacturing output index plummeted to 42.9, the lowest in more than three years. S&P Global’s PMI for the UK was also disappointing, with manufacturing and services sector readings both coming in below expectations at 45.0 and 51.5, respectively.

Investors will now be looking ahead to the Federal Reserve’s two-day policy meeting on 25-26 July and the European Central Bank’s policy meeting on 27 July.

UK inflation rate falls to 7.9%

Last week saw the UK’s Office for National Statistics publish the closely watched consumer price index (CPI) report. The headline rate of inflation eased to 7.9% year[1]on-year in June, down from 8.7% in May and lower than expected. This was mainly driven by a 22.7% year-on[1]year decline in motor fuel prices. Food and drink inflation eased to 17.4% in June from 18.4% in May. Core inflation, which excludes energy, food, alcohol and tobacco, slowed to 6.9% in June after hitting a 30-year high of 7.1% in May.

The report has raised hopes that the Bank of England will be less aggressive when raising interest rates over the coming months. Markets now expect rates to peak at 5.8% this cycle, down from previous forecasts of 6.5%. The peak is expected to be reached in February 2024.

US retail sales rise modestly

In the US, retail sales rose by 0.2% in June from the previous month, while data for May was revised higher to show a 0.5% increase in sales. The data suggests sales have remained resilient despite interest rate hikes, although the rise was lower than the 0.5% increase forecast by economists in a Reuters poll. Online sales surged by 1.9%, the most in six months, whereas receipts at service stations and building material stores declined.

Core retail sales, which exclude automobiles, gasoline, building materials and food services, rose by a healthy 0.6% in June following an upwardly revised 0.5% increase in May. Core retail sales are an important indicator of consumer spending, which accounts for more than two[1]thirds of US GDP

Japan raises inflation forecast

Over in Japan, the government raised its inflation forecast for the current fiscal year to 2.6%, up from its January prediction of 1.7%. The announcement came a week before the Bank of Japan’s (BoJ) policy meeting on 27 July. Markets will be keen to see whether the revised forecast will result in the bank raising its own forecast and, in turn, tweaking its ultra-loose monetary policy. Latest figures show headline and core inflation both rose to 3.3% in June from 3.2% in May. Despite inflation persistently exceeding the 2% target, the BoJ has so far defended its stance. At the beginning of last week, governor Kazuo Ueda told a news conference that the BoJ would only change its yield curve control policy if there was a change in its inflation expectations.

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

26/07/2023