BOND MARKETS REMAIN CALM DESPITE SPECULATION THE US FED MAY HIKE BY 1%

  • BOND MARKETS REMAIN CALM DESPITE SPECULATION THE US FED MAY HIKE BY 1%

    BOND MARKETS REMAIN CALM DESPITE SPECULATION THE US FED MAY HIKE BY 1%

    Data Sourced from FE Analytics, and Bloomberg Finance LP

    BOND MARKETS REMAIN CALM DESPITE SPECULATION THE US FED MAY HIKE BY 1%

    This week we saw US CPI exceed expectations (again) while there was a surprise increase in UK GDP in May. The US Fed will be concerned that inflation is not confined to areas such as food and energy but it may take some comfort from the continued decline in commodity prices. The data for the UK covers just one month and the ONS puts the increase down to more GP visits – hardly the basis for robust economic growth. Both measures are lagging indicators and it is never a good idea to attempt to drive by looking in the rear-view mirror. Forward looking indicators remain moderate to poor and despite talk of a 1% rate hike from the US Fed the lack of significant movement in bond markets suggests they expect central banks in the UK and US will have to reverse course next year.

    Meanwhile, the possibility that Russia might cut off European gas supplies has helped push the single currency to its lowest level for 20 years. A potential energy crisis and political instability in Italy means the outlook for Europe could deteriorate sharply.

    GLOBAL: MARKETS SUGGEST RATE HIKES WILL BE SHORT TERM

    US inflation increased faster than expected again as the Consumer Price Index rose to 9.1% in June. The stronger-than-expected inflation numbers have led to speculation that the US Federal Reserve may respond by increasing interest rates by 1% at the next meeting. The Bank of Canada has already surprised markets by hiking rates by 1% and central banks in New Zealand, South Korea and Singapore have all hiked more aggressively this week.

    Markets were relatively calm on Wednesday following the strong inflation numbers, although disappointing updates from some of the big US banks caused US equities to fall later in the week. Yields on longer-dated US Treasury bonds fell slightly, as bond prices increased, although short-dated bonds did sell-off slightly. The yields on short-dated bonds are now above those for longer-dated bonds in both the UK and US, and this suggests markets expect interest rates to be increased aggressively this year but for rates to be cut in 2023.

    EUROPE: EURO HITS PARITY WITH THE DOLLAR AS OUTLOOK DETERIORATES

    For the first time in 20 years the euro hit parity with the dollar. The euro has been falling against the dollar for the last 12 months due to expectations of more aggressive interest rate rises in the US and the forecast for slower economic growth in the EU. The war in Ukraine has also hit Europe harder than the US and this week the European Commission downgraded its forecast for GDP growth to 2.6% in 2022 and 1.6% in 2023.

    Surging energy costs in Europe have piled more pressure on the euro in recent weeks. The continent’s reliance on Russian energy supplies makes it vulnerable to a supply shock if Russia further reduces or cuts off its exports. The Nordstream 1 gas pipeline was shut this week for maintenance amid speculation that it might not reopen. Oil and gas giant Shell joined The International Energy Agency in warning that energy supplies in Europe may need to be rationed this winter if Russian supplies are cut off.

    EQUITIES: RECRUITERS REAP THE BENEFIT OF A TIGHT LABOUR MARKET

    Staff shortages continue to cause problems for many employers. Record low unemployment and falling labour market participation means many sectors are struggling to recruit staff and the British Chambers of Commerce reported that 75% of firms with vacancies are struggling to fill them. The UK’s unemployment rate remains near historic lows at 3.8% and the employment rate continues to rise – although this remains below pre-Covid levels due to the number of working age people who have left the labour market.

    The number of vacancies has risen to a record 1.3m and the tight jobs market is proving very beneficial for the UK’s recruitment industry. This week Hays and PageGroup reported very strong results after Robert Walters last week announced record profits for its first three months of the year. Although shares have lagged the wider market this year they remain one of the sectors to benefit from the current economic conditions.

    For more information regarding our weekly market reports, we encourage you to give us a call on 01732 746188 or send us an email at enquiries@foxgroveassociates.co.uk.

    This document has been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. Financial Express Investments Ltd, registration number 03110696, is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit https://www.fefundinfo.com/en-gb/about/legal-and-policies/.

    admin

    Leave a comment

    Required fields are marked *