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FOR CENTRAL BANKS WORDS ARE MORE IMPORTANT THAN ACTIONS WHEN IT COMES TO INFLATION

  • FOR CENTRAL BANKS WORDS ARE MORE IMPORTANT THAN ACTIONS WHEN IT COMES TO INFLATION

    FOR CENTRAL BANKS WORDS ARE MORE IMPORTANT THAN ACTIONS WHEN IT COMES TO INFLATION

    Data Sourced from FE Analytics, and Bloomberg Finance LP

    FOR CENTRAL BANKS WORDS ARE MORE IMPORTANT THAN ACTIONS WHEN IT COMES TO INFLATION

    This week’s decisions from the Bank of England and European Central Bank were in line with expectations, but the language used to explain them has pushed up the forecast for rate rises. The difficult position for central banks is they are effectively trying to influence expectations for inflation, rather than inflation itself. Current inflation was triggered more than 12 months ago in the recovery from initial Covid shutdowns, while central bank action now will not have any real effect for another 12 to 24 months. Financial markets in the US are already predicting inflation will be around 2.5% by year end. This leaves central banks trying to win the war of expectations in the short term, with the outcome already decided.

    Elsewhere, it was a toss-up between Boris Johnson and Mark Zuckerberg over who had the worst week. Johnson has so far avoided a challenge to his leadership but the departure of many of his senior team further undermines his credibility. As for Zuckerberg the question is whether he will be more upset by seeing £200bn wiped off Meta’s value or by having to admit that no-one under 40 wants to use his flagship service?

    GLOBAL: CENTRAL BANKS OPEN THE WAY FOR FUTURE HIKES

    As expected, the Bank of England announced it will raise interest rates by 0.25% to 0.5% to address surging inflation. Although markets were expecting an aggressive approach from the BoE this year, the news that four out of nine Monetary Policy Committee members were in favour of a 50 basis-points hike left investors surprised and market-based interest rate expectations have increased to potentially reach 1.5% by the end of 2022. UK government bond prices fell following the announcement and the 10-year bond yield pushed up to 1.36%.

    The European Central Bank also contributed to concerns about future rate rises as President Christine Lagarde adopted a more hawkish tone. Although the ECB left interest rates unchanged, Lagarde did not rule out the possibility of rate hikes in 2022 as rising prices pushed Eurozone inflation up to 5.1%. The change in sentiment has now shifted market- based interest rate expectations from zero to potentially four rate hikes in 2022.

    EQUITIES: MORE TURMOIL FOR US TECH STOCKS

    Thursday saw the biggest one day fall in US stock markets in a year as the S&P 500 dropped 2.4%. Tech stocks were the main driver of the losses with Facebook owner Meta’s shares falling more than 25% after it announced a slowdown in profits and said user numbers have fallen for the first time as it falls behind rivals such as TikTok. Paypal and Spotify also fell sharply after falling short of expectations.

    These losses have been balanced by some equally big moves the other way. Earlier this week Google’s parent Alphabet beat expectations by announcing a big increase in revenue, and Facebook rival Snap saw its shares dragged down by Meta’s announcement only to recover by almost 60% after reporting stronger than expected revenues. On Thursday, Amazon saw its shares rise 15% after it reported strong earnings and announced a big increase in the annual fee for Amazon Prime. The outsized moves in tech stock have masked an overall positive earnings season so far as most large companies exceeded expectations.

    UK: REMOVAL OF COVID RESTRICTIONS SEES ACTIVITY RECOVER

    Norway and Denmark have joined the UK in lifting restrictions to limit the spread of Covid-19. Switzerland and Sweden have also said their restrictions will be lifted soon. Since the UK lifted Covid restrictions on 19th January economic activity has increased steadily. Retail footfall is around 82% of pre-pandemic levels, while debit and credit card transactions are around 90% of their February 2020 level. Pret A Manger reports business in the West End of London is almost back to pre-pandemic levels and its UK business is far busier than other markets such as New York, Paris or Hong Kong.

    This recovery is filtering through to business results. This week SSP, owner of Upper Crust and Camden Food Company, said the most recent restrictions saw its recovery slow in December and early January but things are continuing to improve now restrictions have lifted. Retail landlord Shaftesbury has also reported that 88% of rent due in the most recent period was collected as shoppers return to the West End.

    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/.

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