Sterling and Arsenal Start Slipping
Last Thursday, the Old Lady duly raised rates by 25bp after a vote of 7-2 from the Monetary Policy Committee, with the two votes against favouring leaving rates unchanged. The currency markets reacted by initially pushing the pound moderately higher in a knee-jerk reaction before slipping as the market responded to events across the pond. Following the announcement of the rise, Andrew Bailey, the BoE’s hapless governor, faced the press in what was a seemingly hostile press conference. With inflation over five times the Bank’s target rate, the Bank deserves all the criticism it is getting. Its forecasts of inflation dropping below 2% in a couple of years have scant credibility after its disastrous recent record on forecasting. Adding to the Old Lady’s woes were the pretty disappointing Gross Domestic Product figures released on Friday, which showed that first-quarter growth was just positive. The worry in the GDP figures was that they reported a fall of 0.3% for March, leaving economists groping for reasons for the drop and blaming everything from the weather to strike action. Whatever the reason, the truth is that growth resembles the activities of an asthmatic snail, and the UK is facing stagflation.
Away from the rain-soaked streets of the UK, in the US, the dollar found some new support towards the end of the week despite a lacklustre run of data. It appears that although the near-term future policy of the Fed may be data-dependent that financial markets are less concerned and are more concerned with the US debt ceiling. It feels that there is a debt ceiling crisis virtually every year; however, to be fair, there seems to be more brinkmanship by the two parties this year, which is unsettling the markets. Of course, there is also the continuing woes of the regional banking sector in the US, which is also denting risk sentiment. Not wishing to scaremonger, but there are over 4000 regional banks in the US. It would be more of a surprise if no more problems were lurking, which are as likely to be caused by commercial real estate as by the recent sharp upward moves in interest rates. So far, JP Morgan has been willing to absorb the smaller banks, but it is a fool’s errand to think that large banks can absorb small banks without eventually absorbing the problems that brought the tiddlers to their knees.
Lest we feel smug on this side of the pond, it is worth noting that there are over 5000 less well-known banks in Europe. Was Mark Branson, president of the German regulator BaFin (Federal Financial Supervisory Authority), hinting at European problems when he told CNBC that he was nervous? It’s hard to sum up, the uncertainty of the outlook at present better than Carsten Brzeski from ING did last week when he said: “The word of the moment appears to be ‘polycrisis’, defined by Collins as the simultaneous occurrence of several catastrophic events. It’s apt, given the war in Ukraine, inflation, and the pandemic… you name it. Europe’s been at the epicentre of most of it. Now it seems a US variant is in the making.”
Not the happiest of outlooks all around, and of course, the question is will this week’s data run bring any respite and finally give the markets a sense of direction? Having had over two months of gains, Sterling suddenly looked a little shaky after the Bank of England’s. Today Andrew Bailey is due in front of a Treasury Select Committee, which should have him twitching nervously in his chair! Tomorrow we will see how wage growth and unemployment are doing when the ONS releases the monthly figures. Most analysts are not looking for massive changes from last month on the jobs front unemployment is still holding around 3.8%. Pay growth is also expected to have stayed at approximately 6.7%, and the Bank of England will undoubtedly be praying that it hasn’t accelerated again and, in doing so, add pressure for more hikes. With strikes still ongoing, there is still upward pressure on wages, which is not good news for inflation, but of course, a strike is a demand, not a settlement. Europe has a relatively quiet calendar starting with sentiment surveys in Germany tomorrow before the critical release of April CPI on Thursday, expected to show annualised growth of 7%. Our cousins in America have Retail Sales and Industrial Production scheduled for release as well as the weekly employment data, which is starting to soften. Any signs of weakness will lead to more thoughts that the Fed will begin cutting rates as soon as September. We still believe, unless a severe financial shock emerges, to be unlikely and actually wouldn’t be surprised if the Fed had to raise rates again later in the summer. Whether the plethora of speakers from the Fed and the ECB improve sentiment this week, we will have to wait and see. Finally, and it hurts to say it as an Arsenal fan, congratulations to Manchester City on surely winning the Premiership.