EQUITY AND BOND MARKETS BENEFIT AS US INFLATION DROPS TO ITS LOWEST IN TWO YEARS
This week brought a significant shift in the narrative surrounding inflation. US headline inflation dropped to 3% in June. Core inflation has been more resilient than the headline rate but it also fell.
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Summer Outlook
Positive equity markets have been offset by declines in bond markets as persistently high inflation has pushed central banks towards further rate hikes.
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PESSIMISM FROM THE FEDERAL RESERVE IS CONTAGIOUS AS VOLATILITY RETURNS TO EQUITY MARKETS
This week government bonds took another leg down and volatility returned to previously bullish equity markets.
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GOVERNMENTS TOLD TO ALIGN FISCAL AND MONETARY POLICIES TO GET INFLATION UNDER CONTROL
This week it was the Bank for International Settlements’ turn on the subject of inflation. Aside from encouraging central banks to stay the course, the BIS pointed out that getting inflation down is made harder when fiscal policy is running counter to monetary policy.
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BANK OF ENGLAND’S FIGHT AGAINST INFLATION IS MADE HARDER BY BETTER CONSUMER SENTIMENT
This week we saw the Bank of England make a big effort to try and get on top of inflation. The bank has been repeatedly caught out by inflation that has risen far higher and lasted far longer than predicted.
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THE FED AND ECB STICK TO THE SCRIPT BUT MARKETS ARE ON NOTICE OF MORE HIKES TO COME
This week’s central bank interest rate decisions came in as expected. The Federal Reserve left rates unchanged – the first time it has opted not to hike since March 2022 – while the European Central Bank increased rates by 0.25%.
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DEVELOPED ECONOMIES HAVE ALL STRUGGLED WITH INFLATION BUT THE OUTCOME MAY NOT BE THE SAME
This week we saw clear signs of divergence across the global economy as various regions battle inflation.
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POSITIVITY IN THE US FOLLOWING DEBT CEILING DEAL CAN’T HIDE THE GENERALLY GLOOMY OUTLOOK
This week the biggest headlines have been about the deal to prevent the US government defaulting on its debts. When it came to the crunch, Congress and President Biden’s administration managed to achieve the basic function of government by keeping the lights on.
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RISING CORE INFLATION MEANS BANK OF ENGLAND IS EXPECTED TO KEEP RAISING INTEREST RATES
This week more doubt has been cast on the widely held view that central banks are about to bring an end to interest rate hikes. The decline in the UK’s headline rate of inflation was not as big as expected as food, housing and services continue to rise, leaving the Bank of England’s recent upward revision to its inflation forecast in doubt.
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ARE EQUITY MARKETS TOO OPTIMISTIC OR IS THE VIEW OF BOND INVESTORS TOO BLEAK?
This week has seen more optimism in equity markets, while bond investors continue to take a more gloomy view. In the US, negotiations over the debt ceiling appear to be making some progress and this helped the positive sentiment towards US equities.
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