Week ending 6th May 2022.

WMG090522

This week equity markets were all about Fed and BoE monetary policy meetings.

Given recent inflation data is screaming for higher interest rates, it was no surprise to us that both central banks increased interest rates:  the Fed increased US interest rates by 0.50% and the BoE increased UK interest rates by 0.25%.

However, of more importance to us was the margin of the policymaker’s vote and comments in the accompanying press conferences on the potential speed and magnitude of future increases – and while both were music to our ears, unfortunately, it didn’t prevent equity markets from ending the week lower.

In the US, the Fed chair, Jay Powell effectively ruled out an aggressive series of large interest rate increases.  While he stated that the Fed is likely to continue to increase interest rates, each increase would be no more than 0.5% – and regular readers of our commentaries will know that we have argued that financial markets were wrong to expect (and price-in) a series of aggressive increases in interest rates, as we believe that interest rates increases should instead be measured and limited simply because the current high inflation rate is not a result of excess demand.

While we appreciate that the current transitory drivers are likely to hang around for a while longer thanks to the war in Ukraine and new coronavirus lockdowns in China, they will still shortly become next year’s ‘base effect’ – meaning we should see inflation numbers peak later this year and then fall (and fall sharply) during 2023 on its own volition without the need for central banks to aggressively increase interest rates.

It was a similar story in the UK.  Although the vote was split 6-3 for the 0.25% increase (three policymakers wanted a 0.5% increase), two of the nine policymakers didn’t see the need for any further interest rate increases.  This was driven by the fact that the BoE now forecasts that the UK economy will contract by 0.25% in 2023 – which gels with our view and comments that the UK economy would not be able to withstand significantly higher interest rates.  Additionally, this suggest to us that providing inflation doesn’t become unanchored, interest rates won’t stay ‘high’ for long.

Looking ahead to this coming week, we have UK Q1 GDP; UK & Eurozone industrial production; US & Chinese CPI & PPI inflation; University of Michigan consumer sentiment index; Chinese trade balance; and Japanese household spending.

Investment Management Team

The latest market updates are brought to you by Investment Managers & Analysts at Wealth at Work Limited which is a member of the Wealth at Work group of companies.

Links to websites external to those of Wealth at Work Limited (also referred to here as 'we', 'us', 'our' 'ours') will usually contain some content that is not written by us and over which we have no authority and which we do not endorse. Any hyperlinks or references to third party websites are provided for your convenience only. Therefore please be aware that we do not accept responsibility for the content of any third party site(s) except content that is specifically attributed to us or our employees and where we are the authors of such content. Further, we accept no responsibility for any malicious codes (or their consequences) of external sites. Nor do we endorse any organisation or publication to which we link and make no representations about them.