Hike in May and Go Away
The state of the UK economy was laid bare for all to see last week, and to be frank, it was not a pretty sight. Those of us who live here are more than well aware inflation is not dropping, and the official figures confirmed this as they stay stubbornly stuck above the 10% level. In reality, though, for anyone buying the staples of life, the number is much higher, and this was highlighted by the report from the UK consumer watchdog Which, where food inflation was shown to be 17.2%. There is, without a doubt, some profiteering by the large supermarket chains, but there is also a worldwide squeeze on commodities, including such items as sugar and wheat, feeding the rises. It is also true that the official inflation rate should drop sharply for technical reasons as the indexes adjust and last year’s rises come into play, but it is still a problem that the Bank of England has to deal with without delay. Whilst the inflation data was pretty shocking for the Old Lady, the wage element of the unemployment data also showed surprising strength, which is a concern as that could give inflation another nudge.
Taking the inflation and wage data into consideration, it looks nailed on that interest rates will rise higher, starting with a 25bp hike after the next meeting of the Bank in early May. Derivative markets also expect further moves up towards a terminal rate of 5% towards the end of the summer. This path should have been taken some time ago, but the Bank of England chose to stick its head in the sand. Although it was the first to act, it was then slow to take decisive action. It is now facing the reality of hiking into a recession as they face the worst economic scenario possible, stagflation. All doom and gloom, although, to be fair, the Retail Sales weren’t quite as bad as painted, and the Purchasing Manager’s Indexes held up pretty well. Sterling also held up, even spiking up on the inflation data. However, whether it can avoid slipping sharply is probably in the hands of Andrew Bailey and his flip-flopping partners to act decisively.
The currency markets, as are most other financial markets, are pretty sleepy at the moment, and volatility is running at very low levels. Quiet periods are often a lull before the storm, but looking at what is due this week from a dull data docket, it’s hard to see what will give them a shove into activity. The US has the busiest schedule, which, to be honest, is a pretty loose use of the word busy! The most likely to cause some movement in the market is the grandly named Core Personal Income deflator which is amongst the Fed’s favoured indicators of inflation. Its forecast to rise by 0.3% monthly and 4.5% annually. With the Federal Reserve still concerned primarily with inflation, unless there is a surprise drop in the number, another 25bp rise in rates in the US looks almost certain. This may be the last rise for some time, and to adapt an old City maxim, this could be a case of hike in May and go away. Many observers are looking for signs of a recession which, in our view, are still not convincingly apparent, and the Personal Consumption numbers are unlikely to change their course, especially if they reflect the recent strength in US Retail Sales. The other major release in the US this week, Gross Domestic Product on Friday, is expected to slightly disappoint, as are the housing data and consumer confidence. There is not a lot of data coming out in the eurozone this week, with Germany the centre of attention with Business sentiment indicators released later this morning and Consumer sentiment on Wednesday. The UK also has a chance to catch its breath after last week’s tsunami of information with only second-tier data on the calendar. With the Fed, The ECB and the Bank of England all looking to raise rates over the coming weeks, 25bp, we will likely get another quiet week ahead of the central bank meetings. Nothing scheduled is likely to upset the apple cart from a macroeconomic data point of view. There are not even speakers from the Fed to keep us amused as they have entered their quiet period ahead of the next meeting of the FOMC on 3rd May. Hey ho, there is always the dark horse of geo politics lurking, but even that looks relatively stable at the moment, and hopefully, it will stay so!