OND MARKETS REMAIN UNCONVINCED BY CENTRAL BANKS’ DECLARATION OF THE END OF LOW RATES
Data Sourced from FE Analytics, and Bloomberg Finance LP
BOND MARKETS REMAIN UNCONVINCED BY CENTRAL BANKS’ DECLARATION OF THE END OF LOW RATES
This week we learned that the end is nigh, or at least the era of rock bottom interest rates and sub-2% inflation is apparently at an end. The dignitaries gathered at the ECB’s forum on central banking took turns to spell out how determined they are to tackle inflation. As well as trying to signal to markets that they are willing to do whatever is necessary to get a handle on inflation, this also served as a warning that economies and households will be shouldering the burden. Markets appeared only partly convinced. Fear of recession caused more volatility for equities, but the yield on Treasuries and Gilts fell – not a typical reaction if interest rates are expected to stay high.
Bank of England governor Andrew Bailey used his turn on the microphone to warn that the UK’s economy will weaken before other developed countries as inflation will be more keenly felt. Along with other central banks, the Bank of England has been slow to tackle inflation and it is still struggling to get ahead of the curve, but Bailey has at least been keeping an eye on the data as GDP and retail sales are already falling.
GLOBAL: CENTRAL BANKS SAY ERA OF LOW INTEREST RATES IS OVER
The Bank of England joined the European Central Bank and the US Federal Reserve to declare an end to the era of low interest rates and low inflation. The heads of the three central banks also said they may take more drastic action to prevent high inflation becoming persistent. This followed a warning from the Bank of International Settlements that developed economies risk being caught in a high inflation world if wages rise steeply and feed further inflation. The BIS wants more aggressive action now, saying any short-term pain is preferable to dealing with high inflation if it becomes entrenched.
German consumer inflation data was one bright spot among new economic data out this week. CPI in Germany unexpectedly fell in May as the German government cut fuel duty and reduced rail and bus fares to ease the cost of living. This suggests governments, not central banks, are better able to tackle inflation in the very short term. Bond markets were unmoved by central banks’ statements as yields on Gilts and US Treasuries fell this week.
UK: ECONOMY IS WEAKENING FASTER THAN OTHER DEVELOPED COUNTRIES
Bank of England governor Andrew Bailey warned that the UK is already suffering more from inflation and the economy is likely to weaken more than other developed countries due. Despite the deteriorating outlook he also raised the possibility of a 0.5% interest rate hike if necessary to tackle inflation. Rising prices are continuing to squeeze consumers as household disposable income fell by 0.2% in the first quarter of 2022 when adjusted for inflation. The figure excludes the impact of the recent rise in energy costs and tax hikes that were introduced in April.
The British Retail Consortium reported that food inflation hit 5.6% in May – the highest rate since 2009 – and retailers are passing on costs to consumers at the fastest rate in 14 years. Rising costs saw retail sales fall by 0.5% in May and consumer confidence has fallen to a fresh all-time low. Meanwhile, the UK’s current account deficit grew to a record 8.3% of GDP in the first quarter, driven mainly by increased imports of manufactured goods and oil.
EQUITIES: AIRLINES STRUGGLE AS STAFFING PROBLEMS CAUSE DISRUPTION
The travel industry is still trying to recover from the coronavirus pandemic as it struggles to cope with resurgent demand as staff shortages continue to cause disruption. Heathrow updated its passenger forecast to 54.4m passengers this year, 67% of pre-Covid levels, however, its chief executive warned that it would take up to 18 months for the industry to fully recover. It also warned that rising inflation may erode demand and that a resurgence of Covid also remains a risk.
The government and aviation regulator have ordered airlines to ensure advertised flights go ahead and to avoid any disruptions similar to those seen during the June half-term. BA, EasyJet and Wizz Air have cancelled thousands of flights while Gatwick also recently cancelled hundreds of flights to avoid further disruption this summer. Cancellations mean revenues remain far below 2019 levels and profitability is some way off. Heathrow received a further blow this week when it was told to partially reverse the increase of its landing fees.
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