CITY ANALYSTS LOSE THE PLOT OVER FUTURE INTEREST RATE RISES

CITY ANALYSTS LOSE THE PLOT OVER FUTURE INTEREST RATE RISES

This week inflation again took centre stage as the Office for National Statistics released its analysis of price rises in May. While the headline figure of 2.1 per cent grabbed the attention, the detailed breakdown is far more revealing. Fuel prices are still adding to the increases but big rises in restaurant prices and the cost of clothes and shoes are the main drivers. This is consistent with an economy that just reopened its high streets and indoor hospitality. Interestingly, passenger transport by sea or inland waterway fell the most, perhaps reflecting a lack of demand for ferry tickets.

Elsewhere, the US Federal Reserve released its now much vaunted dot plot. While the investment industry sometimes gets criticised for making things too complex, in this instance almost all global finance is fixated on where members of the Fed’s interest rate setting committee have put their marks on a bit of paper. Analysts use these dots to estimate what the central bank will do years into the future, seemingly forgetting the plot gets changed up to four times a year.

US: FEDERAL RESERVE INDICATES INTEREST RATES TO RISE IN 2023

US Federal Reserve chairman Jerome Powell described it as ‘talking about talking about’ raising rates as the US central bank made the first small steps towards tightening interest rates. As expected, the US Fed held interest rates at their current level and left its asset purchase programme unchanged despite US inflation recently coming in surprisingly high at 5 per cent. The Fed has consistently said it will take no action until it is confident the job market is fully recovered, and that it will allow inflation to run above target in the short-term to do so.

Although there was no action taken this month, the expectations of the Fed’s interest rate committee members have changed considerably since the last estimate in March and the consensus among the committee members is now for two rate hikes in 2023. This slight change in stance by the Fed and the changing views of the committee members saw US government bonds fall, causing yields to rise. US equity markets also fell in the aftermath of the Fed’s meeting while the dollar appreciated strongly.

UK: INFLATION PUSHES ABOVE 2% TARGET AS LOCKDOWN LIFTS

Economic recovery as the UK emerges from lockdown has seen inflation push up to 2.1 per cent. This is the first time it has been above the Bank of England’s official target since 2019. The Bank of England kept interest rates on hold at its meeting last week and there is little expectation that it will begin raising interest rates anytime soon, but the prospect of higher inflation has seen UK gilts fall in value this week, pushing yields up.

The BoE has consistently said that any increase in inflation this year will be short-term in nature as spending resumes after Covid-imposed restrictions. The latest data from the Office for National Statistics supports that view. The biggest contributors to the recent rise in inflation come from areas like travel, particularly petrol and diesel, as spending was artificially low this time last year due to the first lockdown and falling oil prices. Clothing sales also contributed to the recent rise in inflation as last year many retailers offered steep discounts to shift excess stock during the first lockdown.

EQUITIES: COVID CASH RAISING CAUSES IPO BOOM

The coronavirus pandemic has seen a surge in the number of companies listing on global stock markets. The amount of money raised through IPOs in 2021 in the US has already exceeded the record for an entire year (which was set last year). New listings in the UK have lagged the US slightly but 2020 saw the largest number of IPOs in a decade and 2021 is proving just as busy so far. Some companies have been turning to stock markets to help raise funds to cope with lockdown but many more have decided to take advantage of the huge demand from investors.

This is a sharp reversal of the trend in recent years which saw a dwindling number of companies choosing to list in the UK. This week international money transfer company Wise, formerly Transferwise, became the latest to confirm it will list in London. This follows several successful high profile technology IPOs, including The Hut Group last year and Darktrace earlier this year. Unusually the company is using a direct listing as it is not trying to raise new capital.