Over to Threadneedle Street
Over the last few days, both the Fed and the ECB, in their own ways, tried to convince the markets that the peak of interest rates hasn’t yet been reached. The Fed, as broadly expected, skipped raising rates for the first time in a year but at the same time made it clear through the dot plot that more hikes are to come and, yes, rates were going to stay higher for longer an idea which I will return to shortly. The ECB was more hawkish than the Fed when after also raising rates by 25bp, President Lagarde, when talking about inflation, said that “more ground needs to be covered”. She also made clear that another hike is on the cards next month against a backdrop of the worsening economy. Do I hear the word stagflation? Certainly, it looks that way. The economy also looks like it’s on the turn in the US, but in the post-covid world it’s harder than ever to read data, and the Fed will err on the side of caution over the inflation fight, and rates look on course to rise by another 50bp if not more. So higher for longer from the Fed and the ECB, and I believe they really mean that rates will stay high for months and years.
In Westminster, the Bank of England’s beleaguered governor had a tough week last, not undeservedly. A Commons Treasury select committee was scathing over the Bank’s forecasting methods and record on inflation, and an inquiry is now in progress. Their criticism appears justified, and Andrew Bailey admitted as much in front of another committee, this time in the House of Lords, when he said there were lessons to learn. There certainly are lessons to be learnt, and the public is aware of this, and a survey by Ipsos on net satisfaction with the Bank reported that it is now at its lowest level since records began. In fairness, another poll showed that 3% of people in the UK thought interest rates had dropped in the last six months! Perhaps the public should spend more time reading and less time looking at their phones.
Despite Andre Bailey’s troubles, the pound gained nearly 2% against the greenback over the last seven days ahead of a week where it should hog the limelight. On Thursday, the TV cameras will be out in force in Threadneedle Street, awaiting the Bank of England’s Monetary Policy Committee meeting results. Recent data from the UK confirms our worst thoughts about inflation and the effect it’s having on wages which seem to be increasingly linked. Before the MPC meeting on Wednesday morning, the latest CPI data is scheduled for release, which is forecast to drop again. Whether the number gives the Old Lady pause for thought, who knows. In reality, The Bank of England and its incompetent Governor have only themselves to blame for letting the inflation genie out of the bottle and, more importantly, failing to put the stopper back in quickly enough. The Old Lady now has to battle spiralling prices and the financial markets’ expectations, currently pricing the terminal Base Rate level at 6%. Whether Base Rate actually gets there, which I believe it will, the journey towards it will likely continue with a 25bp rise on Thursday, followed by another in August. Of course, businesses and mortgage holders will suffer, but unfortunately, to paraphrase ex-Prime Minister Sir John Major, “There is no gain without pain”.
Away from our beautiful shores, the main event will be Fed Chairman Jerome Powell giving his semi-annual testimony to Congress on Thursday, where he will no doubt continue with the higher for longer mantra whilst basking in the glow of a still robust labour market. Plenty more Fed and ECB members will speak this week, most of whom will toe the party line of talking tough on inflation. Aside from the aforementioned inflation data in the UK, the major releases are at the end of the week when S&P publish their take on Purchasing Managers Indexes. In all honesty, these rarely impact the markets, which probably means they will this month! The UK also has Retail Sales scheduled for Friday, and the US has housing data and weekly employment numbers. It is also worth noting that the US is closed today for a Juneteenth, and the Norges Bank holds its monthly meeting on Thursday, where it is likely to join the ECB and the Bank of England in hiking rates by 25bp.