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Please see the below article from Invesco regarding the weeks Central Bank news:

Last week was a big one for monetary policy, with four major central banks rendering policy decisions. Their decisions reflect the fact that their respective economies are in very different places.

The Federal Reserve holds steady for now

The week started with the US Federal Reserve (Fed) holding rates at current levels. But it was a decidedly hawkish pause, with the Fed suggesting more rate hikes could be coming soon. The Summary of Economic Projections – known as the “dot plot” – showed that the Fed anticipates two more rate hikes this year. This is borne of concerns that core inflation is too sticky – the Fed revised up its projection for core inflation and revised down its projection for unemployment for the end of the year. Now the dot plot is just each member’s policy prescription — it can be very wrong at times, and it can change significantly over time. You may recall that the dot plot released in December 2021 forecast a median fed funds rate of 0.90% by the end of 2022. The Fed couldn’t have been more wrong, as the fed funds rate ended 2022 in the 4.25% – 4.50% range.

And so markets seemed to shrug off this development, even though Fed Chair Jay Powell shared during his press conference that “nearly all” committee members expected further rate tightening in 2023 would be necessary to bring down inflation. My read on this hawkish dot plot and Powell’s hawkish words is that they’re intended to stop the market from assuming there will be any rate cuts this year and keep financial conditions from easing. The Fed wants to keep inflation falling – and prevent any reacceleration.

The Fed is faced with a resilient US economy, one that seems to be handling the aggressive tightening cycle very well. The labor market remains surprisingly tight, which could mean that inflation remains stubbornly high. And so the Fed is comfortable with a hawkish pause and the ability to hold further tightening — that “sword of Damocles” — over markets.

Having said that, if the Fed does tighten two more times this year, I believe it really risks overkill – sending the economy into a significant recession. I’m sounding like a broken record, but I’ll say it again: There is a lengthy lag between when monetary policy is implemented and when it actually shows up in the real economy data, which Powell acknowledged in the press conference. We haven’t seen much of an impact yet because of that lag. That’s why we have to worry so much about overkill. I believe today’s Federal Open Market Committee (FOMC) should heed the words of then-San Francisco Fed President Janet Yellen, who shared the following thoughts during the May 2006 FOMC meeting:

“I strongly favor a pause in our campaign in order to evaluate the effect of our policy actions to date, unless incoming data after this meeting contain large upside surprises….I do certainly understand the urge to continue raising rates at every meeting until we’re sure the economy is slowing. I still remember very well the 1994 tightening episode, and then, as now, there was a sense of great momentum in the economy, posing significant upside risks to inflation. In circumstances like that, the urge to continue tightening is natural. It is instinctual. Unfortunately, with policy lags such a strategy is a sure recipe for overshooting. If we’re lucky enough to stop at exactly the right point this time, as I believe we actually did in ‘95, we can be sure that it will feel risky at the moment we stop and wise only in retrospect. The risks for policy, in my view, are now two-sided…”

The European Central Bank continues to hike

The European Central Bank (ECB) hiked rates last week with more to come, which I believe is appropriate. The eurozone economy is in a different place than the US economy. The ECB started hiking rates later and has not been as aggressive. In particular, the ECB stuck with the transitory inflation philosophy even longer than the Fed or Bank of England.

It turned out demand was very strong on reopening in the eurozone. Plus, European governments, such as the UK, in effect supported both household and business spending by insulating their economies from the energy price shock with price controls and budgetary subsidies. The result was that eurozone (and UK) consumption and business spending have been stronger than expected, and inflation has been higher than expected. Hence it is no surprise that ECB President Christine Lagarde made it clear that there is more work to be done.

The Bank of Japan stays patient

The Bank of Japan (BOJ) maintained its ultra-accommodative monetary policy at its meeting last week and said it would continue to “patiently” maintain this policy. This surprised some given that Japan has experienced higher-than-expected inflation in the past year and that the BOJ upwardly revised its expectations for employment and household income.

Japan is an outlier among major developed economies. It’s experiencing its strongest economic growth in decades, and the BOJ may not want to prematurely extinguish it. Not surprisingly, the Japanese yen fell in response. I suspect the BOJ will need to implement some tweaks to its yield curve control policy in coming months or quarters, but it seems willing to keep its key policy rate lower for longer, tolerating the risks of elevated inflation since it is something of a welcome curiosity for an economy that has been in the doldrums for multiple decades.

The People’s Bank of China seeks to enable economic growth

Then there is the People’s Bank of China, which actually increased monetary policy accommodation while much of the world is tightening. This makes sense. I believe the economic recovery has long legs. But I also recognize that disappointment with recent economic data has triggered a growing view that China may not have provided enough stimulus during the pandemic relative to other major economies and that its economy could benefit from more stimulus now. The People’s Bank of China is lowering policy rates to help goose the nascent economic recovery.

Up next: The Bank of England

Another major monetary policy decision — from the Bank of England (BOE) — is coming this week. The BOE is between a rock and a hard place as the UK experiences a weak economy plagued by high inflation – though it has to be said that UK growth has proven more resilient than most everyone expected (including the BOE itself).

I expect the BOE to hike rates even though that would hurt UK households who are already suffering from higher mortgage rates. With Prime Minister Rishi Sunak’s government saying it will not provide fiscal help to these households, the BOE — similar to the Bank of Canada, which hiked rates earlier this month — risks hurting the economy more than it helps in its attempts to combat inflation.

Having said that, the BOE probably has the strongest case of any of the major developed market central banks to tighten more aggressively and for longer than had been expected. Inflation is high, and the UK needs the BOE to get a grip on it. This is likely better for gilts and sterling than for UK equities in the shorter term, as UK consumers may well feel the pinch on both real incomes and mortgage payments from high inflation and interest rates.

Investors react to these developments

Taking a step back, the general mood among US investors is becoming more positive. There is a realization that the US is at or very close to the end of its tightening cycle, and the economy has remained resilient – especially the labor market.

US high yield credit spreads have narrowed in recent months, suggesting a greater likelihood of a softer landing for the US economy, which should be positive for the global economy. And, reflecting a growing sense of investment FOMO — the fear of missing out — the most recent American Association of Individual Investors survey shows the widest bullish-bearish spread since November 2021. Monetary policy matters, and it’s generally becoming more supportive of risk assets.

Other investors are not as positive. For example, the Eurozone Sentix Investor Confidence reading has been pessimistic for some time, clocking lower in the last two weeks. A contributing factor is likely the ECB’s hawkish monetary policy stance. In addition, a lot of negative sentiment is likely priced into Chinese equities already, and they are trading at the low end of their historical valuation range, despite more monetary and fiscal stimulus in the offing.

Negative sentiment presents opportunities. There should be a growing realization that it is not just the US – that other major Western developed central banks are at or nearing the end of their tightening cycles while the Bank of Japan and the People’s Bank of China are maintaining or increasing their accommodative monetary policies. I believe this is a time to be looking for attractively valued assets with upside potential for the next year and beyond.

Comment

We now know the Bank of England’s MPC decision to increase the base by 0.50% to 5%. The UK is in a difficult position with inflation holding steady at a higher than anticipated level.

The focus will remain on Central Bank policy decisions and the data that will influence these.

Steve Speed Dip PFS

23/06/2023

Please see the below article from Evelyn Partners commenting on The Bank of England’s decision to raise the base level of interest rates by 50 basis points to 5.0%. Just received – 22/06/2023.

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

Adam Waugh

22/06/2023

Please see the below article from EPIC Investment Partners providing their Daily Update on the UK Inflation Shock. Received yesterday 21/06/2023.

UK inflation surprised to the upside for the fourth month in a row this morning, increasing the pressure on the Old Lady to accelerate interest rate hikes. CPI rose 8.7%yoy last month, the same as April and well above the 8.4%yoy eyed, with the month-on-month printing 0.7%, again above the eyed 0.5%, although this was lower than the previous of 1.2%.

However, core inflation, which strips out food and energy prices, accelerated to 7.1%yoy, again well above economists’ expectations of 6.8%yoy, to the highest level since the year Basic Instinct was released. This will be of particular concern to the BoE, as core inflation, one of the measures closely watched by the committee, continues to soar as other countries start to see it fall.  

The Office for National Statistics said in its statement following the release: “Rising prices for air travel, recreational and cultural goods and services, and second-hand cars resulted in the largest upward contributions to the monthly change in both the CPIH and CPI annual rates”. It went on to add: “Live music events and computer games also contributed to inflation remaining high. These were offset by a fall in the cost of petrol. Food price inflation also remains high, but the rate has eased slightly.”

We got the obligatory two-pennies-worth from the Chancellor, who said: “If you look at what’s happening in other countries, you can see that rises in interest rates do bring down inflation over time. That will happen here, but we need to be patient, we need to stick to the course and then we’ll get to the other side”.

So, now attention turns to the BoE tomorrow. After 12 consecutive hikes, a 25bp rise is already nailed on. However, the market is now pricing in a 50% chance of a 50bp hike, and currently pricing an interest rate peak of 6% by December.

In a separate report, the ONS revealed that the government debt has now exceeded 100% of the GDP, marking the first time this has occurred since 1961. The government borrowed GBP20bn in May, beating forecasts. The deficit for the month, the second highest since modern records began in 1993, rose from GBP9.4bn last year. The increase was driven by cost-of-living payments, including energy subsidies and higher staff costs.

Rishi Sunak’s promise to restore health to public finances and cut inflation looks increasingly like a pipe dream.

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

Alex Clare

22/06/2023

Please see this week’s Weekly Market Commentary from Brooks Macdonald detailing the latest economic and market news:

Equity markets continued their rally last week with the US technology sector surging

Despite a small sell-off in US indices on Friday, last week saw a surge in equity markets, led by the US technology sector yet again. Other regions enjoyed this improved risk appetite with the European index rising just under 1.5% over the course of the week.

US consumer inflation expectations fell over 1-year which will be welcomed by the US Federal Reserve

Last Friday saw the release of the University of Michigan survey which contains inflation expectations over the next year as well as the longer-term views of consumers. With US inflation starting to slow, the 1-year estimates of US inflation fell rapidly compared to the previous month, coming in at just 3.3% versus 4.1% expected and 4.2% last month. These consumer inflation expectations are a very important input to areas such as wage demands and are closely watched by the Fed. Whilst there was good news on the 1-year measure, 5-year consumer inflation expectations remained well above the Fed’s 2% target, at 3%. Lastly, consumer sentiment beat market expectations with a large uptick versus May’s reading. That said, sentiment remains suppressed versus history as consumers brace for possible recession risks.

This week the focus will be on the UK’s inflation data as well as how the Bank of England reacts

This week will see the market’s attention switch to the UK inflation and interest rate outlook with the UK Consumer Price Index (CPI) release coming on Wednesday ahead of the BoE’s latest policy changes on Thursday. In terms of the inflation report, the market expects both UK Core CPI (6.8% year-on-year at the last reading, 6.7% expected this time) and UK Headline CPI (8.7% year-on-year at the last reading, 8.4% expected this time) to come down although both readings are highly elevated. The BoE is then expected to raise its bank base rate from 4.5% to 4.75% on Thursday in response to the higher inflation pressures.

The weekend papers were awash with stories detailing the impact of expected higher UK base rates on mortgage costs. Two-year gilt yields are now at their highest level in 15 years with UK 2-year mortgage rates now above 6% as a result. With inflation, and interest rates, now becoming an even hotter political topic in the UK, investors will be watching the BoE statement on Thursday closely. Over the last 12 months the BoE has raised interest rates but at the same time delivered a balanced message around the need to weigh inflation risks with economic risks. With inflation receding in the US while inflation remains sticky in the UK, there will be increased pressure to deliver a hawkish message on Thursday.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Andrew Lloyd DipPFS

20/06/2023

Please see the below article from Evelyn Partners providing their thoughts on the FED’s decision to hold interest rates at their present level. Received this morning 15/06/2023.

What happened?

The Federal Reserve met yesterday and chose to hold rates at their current level, for the first time after 10 consecutive meetings where they made increases. This was in line with the market expectations and means the target range remains 5% – 5.25%. The Fed also published their quarterly ‘dot plot’ which shows where committee members see rates heading in the future. It showed rates peaking this year at a level of 5.6%, which is approximately 50 basis points higher than they had been expecting at their March meeting. Expectations for the year end 2024 and 2025 were also revised higher, to median values of 4.6% and 3.4% respectively.

What does it mean?

The long awaiting Fed ‘pause’ has finally arrived, but in rather more hawkish fashion than markets might have expected. The updated dot plot reveals that federal reserve officials expect not one, but two more rate increases before a peak in rates by the end of the year. 

Economic data has generally been stronger than expected. Inflation, particularly the ‘core’ excluding food and energy figure, has not fallen away as quickly as some officials had expected, and the jobs market remains extremely resilient.  The Feds own projections released yesterday revealed a more negative outlook for inflation and more positive stance on the growth and jobs.

The contradiction of not increasing rates at this meeting but signalling more to come was difficult to communicate in the press conference which followed the meeting. Federal reserve chair Jerome Powell said that pausing at this juncture would give the committee “more information to make decisions” and would “allow the economy a little more time to adapt as we make our decisions going forward”. He also said that he expected the next meeting in July to be a “live one”, sending an indication to markets that an increase is likely then.

Committee members of a more dovish outlook likely remain concerned about the recent failure of three mid-sized banks, which began with troubles at Silicon Valley Bank in March.  Powell sounded a note of caution on this yesterday, saying “We don’t know the full extent of the consequences of the banking turmoil we’ve seen”, adding “It would be early to see those”.

Market expectations before the meeting were that there would likely be one further rate hike, so there was some surprise as a further increase was priced in. 2 year treasury bond yields, moved up nearly 20 basis points on the announcement before settling back slightly. The US dollar strengthened relative to sterling by about half a cent and the equity market fell before regaining previous levels.

Bottom Line

The Fed has stopped hiking rates, but only momentarily, signalling to markets that two further 25 basis point rises can be expected before the end of the year, to tame inflation which is not falling as fast as officials has hoped.

While these developments look slightly contradictory, it does give the Fed maximum flexibility for where policy goes from here – if there were to be some big development in the data in the coming months, they can change course.

From our perspective, little has changed – the Fed is close to the top of its interest rate hiking cycle, meaning a headwind for bonds and more interest rate sensitive areas of the equity market will subside.

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

Alex Clare

15/06/2023

Please see below, the latest ‘Markets in a Minute’ update from Brewin Dolphin which provides a brief analysis of the key news and data from markets over the past week. Received yesterday evening – 13/06/2023

Stocks mixed as eurozone falls into recession

Stocks were mixed last week after revised data showed the eurozone slipped into a mild recession in the first quarter of the year.

The pan-European Stoxx 600 fell 0.5% and Germany’s Dax declined 0.6% following a slew of weak economic data for Europe. The UK’s FTSE 100 lost 0.6% ahead of this week’s interest rate decisions by the US Federal Reserve and European Central Bank (ECB).

In contrast, US indices ended the week in the green, with technology stocks boosted by the unveiling of Apple’s virtual reality headset. The S&P 500 entered bull market territory – up more than 20% from its October lows – and finished the week up 0.4%.

Japan’s Nikkei 225 also enjoyed solid gains, rising 2.4% to hit a 33-year high. This came after the Cabinet Office said Japan’s economy grew by more than initially estimated over the first quarter of the year. China’s Shanghai Composite ended the week flat as inflation figures for May raised concerns about the risk of deflation.

Investors await US CPI report

Stocks started this week on a positive note as investors awaited the release of Tuesday’s US consumer price index (CPI) report. The S&P 500 and the Nasdaq rose 0.9% and 1.5%, respectively, on Monday (12 June) to reach their highest closes since April 2022. Economists expect the CPI for May to show a meaningful easing of inflation to 4.1% year-on-year, according to a poll by Reuters. This would add to the case for a pause in US interest rate hikes this week.

Elsewhere, a report from the Confederation of British Industry (CBI) gave a more encouraging outlook for the UK economy. The CBI expects the economy to grow 0.4% this year and 1.8% in 2024, much better than its initial forecast of a 0.4% contraction in 2023 and 1.6% growth in 2024. It also expects food inflation to fall from 15.5% in 2023 to 4.4% next year.

Eurozone GDP shrinks by 0.1% in Q1

Figures released by Eurostat last week demonstrated the impact that the rising cost of living is having on consumer spending in the eurozone. The revised gross domestic product (GDP) data showed the eurozone’s economy contracted by 0.1% in the first quarter of 2023 and in the final quarter of 2022. This means the eurozone slipped into a technical recession, which is defined as two consecutive quarters of declining GDP.

Retail sales figures for the eurozone were also disappointing. The seasonally adjusted volume of retail trade was flat in April, missing expectations for a 0.2% increase. This followed a decline of 0.4% in March. Among individual countries, Germany saw a 0.8% increase in sales, whereas France saw a 1.3% decline.

Meanwhile, factory orders in Germany unexpectedly fell by 0.4% in April from the previous month, according to figures from Destatis. This followed a 10.9% slump in March. On an annual basis, orders were down 9.9%, following an 11.2% fall the month before.

UK house prices fall sharply

Here in the UK, data from mortgage lenders Halifax and Nationwide showed the first annual drop in house prices for over a decade. Halifax reported a 1.0% year-on-year decline in May, the first drop since 2012. Nationwide reported a bigger 3.4% annual decrease in May, the steepest decline for 14 years.

Robert Gardner, Nationwide’s chief economist, said the drop largely reflected base effects, with prices broadly flat over the month after taking account of seasonal effects. “Recent Bank of England data had shown some signs of recovery in housing market activity, although the number of mortgages approved for house purchase in March was still around 20% below pre-pandemic levels,” he said.

Gardner added that headwinds to the housing market look set to strengthen in the near term. “While consumer price inflation did slow in April, it was a much smaller decline than most analysts had expected. As a result, investors’ expectations for the future path of the Bank Rate increased noticeably in late May, suggesting it could peak at around 5.5%, well above the 4.5% peak that was priced in around late March.”

US jobless claims hit 18-month high

In the US, the number of Americans filing new claims for unemployment benefits surged to the highest level since October 2021. Initial claims jumped by 28,000 to a seasonally adjusted 261,000 for the week ending 3 June, well above the 235,000 claims forecast by economists in a Reuters poll.

Volatility in week-to-week data means it is too early to say whether layoffs have increased. The four-week moving average of claims, which is considered a better measure of labour market trends, rose by just 7,500 to 237,250. Continuing claims (the number of people who received unemployment benefits for two or more weeks) unexpectedly fell to their lowest level in nearly four months.

China’s factory gate deflation deepens

Over in China, factory gate prices fell at the fastest pace in seven years in May as demand faded. The producer price index fell by 4.6%, marking the eighth consecutive month of declines, according to the National Bureau of Statistics. This was the steepest fall since February 2016. The data added to concerns that China is facing the risk of deflation – where prices decrease in a sign of a weakening economy. Consumer prices rose by just 0.2% year-on-year in May, and real estate and factory activity have slowed sharply.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economics updates from leading investment houses.

Alex Kitteringham

14^th June 2023