Our Views on the Markets and the Economy
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The pound has weakened recently. The change in market expectations that UK interest rates will peak at a lower level than previously expected has had the predictable impact on sterling that many (including ourselves) thought it would. UK policy rates, currently at 5.25%, are expected by the market to peak at 5.5%; three months ago, this was closer to a 6.25% peak. We think rates have now peaked, but it would not be a surprise if there was another hike.
The unintended consequences of aggressive monetary policy tightening in western economies continues to be a concern, both for the economic and financial market outlook.
Oil prices have risen significantly in recent weeks. This is a double whammy for Western economies like the UK. It squeezes spending power and adds to costs at a time when growth is sluggish, and it pushes inflation up again, perhaps temporarily. Already the recent rise in oil prices has contributed to the markets expecting an increase in the annual rate of inflation in the next monthly data (due on September 20th) because of higher fuel prices.
Here is a short take on the significant themes currently impacting global markets.
Where are we in the economic cycle, and what are the implications for monetary policy? This is perhaps the key current issue for financial markets. Attention is moving from a focus on inflation to what lies ahead for growth and the challenges this may pose for monetary policy.
Next week the Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting looks set to raise interest rates again – perhaps for the last time in this cycle.
Let’s focus on the Bank of Japan (BoJ), whose imminent monetary policy meeting on July 27th to 28th has the potential to be significant, not just in Japan but globally. Any tightening in policy by the BoJ would strengthen the yen (perhaps temporarily), and be interpreted as another positive signal about the economic outlook in Japan. This would help equities there, but also would add to fears in global markets about a further tightening of global liquidity.
When will the Bank of England know it has done enough to curb inflation? Developments during the last week have reinforced the market’s view that the policy rate will rise from 5% to at least 6.25%. This follows data showing a further rise in wage growth and hawkish comments on curbing wage inflation from both the Governor and Chancellor.
It is a year since the US yield curve became inverted, with the yields on ten-year Treasuries falling below those on two-year paper. The last time the US yield curve was inverted like this for a year was in the early 1980s. Like then, now is also a seminal moment in the policy debate.
Employment has recovered from the pandemic and is at an all-time high, with 33.09 million people in work. The unemployment rate is low at 3.8 per cent. Despite this healthy picture there is concern about the UK jobs market. Two issues come to the fore.
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