BoE and US Labour Market In Focus

BoE: Raising Rates, Falling Growth.?

Yesterday, the MPC voted eight-to-one in favour of conducting a 50bpt rate hike, brining the base rate from 1.25% to 1.75%, representing its highest level since 2009. This was also the first time since 1994 that the UK had seen such a 0.5% rise as the central bank attempts to slow down the level of inflation in the UK which currently stands at 9.4%. Threadneedle Street now predict headline inflation to rise to at least 13% and stay above their 2% target rate until the end of 2024 - the antithesis to their earlier forecasts centring around “transitory inflation”. Governor Bailey also forecasts that the UK economy will go into five quarters of economic contraction starting in Q4 2022. Yesterday’s outlook reconfirmed concerns over the health of the UK economy which is set to have the worst level of growth amongst the G7, and the second lowest amongst the G20, after Russia, next year.

BoE Set for Further Quantitative Tightening:

The BoE said that they are “provisionally minded” to start selling bonds in the second half of September, becoming the first major central bank to actively reduce their balance sheet which currently sits at some ￡844bn, representing around 30% of the UK’s GDP. It is expected that Governor Baily will commit to selling between ￡50bn and ￡100bn within the year (starting from September) though they caveated the impact of the sell off by stating that it would not have a major effect in tightening monetary conditions, relative to the hike of interest rates. The BoE are currently passively reducing this by not reinvesting in maturing securities, having reached this decision in February. Since then, the balance sheet has reduced from ￡875bn to ￡844bn.?

In the interest of context, the Fed’s balance sheet sits at around 37% of GDP, while the ECB’s sits at 65% of GDP. Meanwhile in Japan, the BoJ’s balance sheet is currently some 135% of GDP and hence, as one HSBC economist has stated?"Other central banks with hefty balance sheets will be watching on with interest at the BoE's pioneering move”.

Don’t Truss the Forecasts.

Despite the BoE’s warnings over a recession – which fall in line with pretty well all other major economic forecasts – Liz Truss stated that a recession was not inevitable and that while Threadneedle Street’s predictions were “extremely worrying”, reducing the tax burden would turn the economy around. Given Truss’ assessments, Sunak stated that such proposed tax cuts would add further “fuel on the fire” of inflation, exacerbating the prevailing health of the UK economy.

US Labour Market in Focus as Markets Await Nonfarms:???

This afternoon will see the release of Nonfarm payrolls, where the markets are expecting a print of 250,000 new jobs, a sizable decrease from last month’s figure of 372,000. Given last Friday’s Q2 GDP print – which indicated that the US economy contracted at an annualized rate of 0.9% - the White House and the NBER's Business Cycle Dating Committee are keen to maintain that the US economy is not in recession, with their primary reason being that the labour market remains strong. Hence, if Nonfarms fail to deliver today, talks of the US being in recession will continue to gather further momentum, putting further pressure on global risk sentiment.

US 2-10 Yield Curve Inversion Hits 1 Month

Assisted by the release of Q2’s GDP figures, the 2-10 yield curve inversion is now at its highest level in 22-years. The inversion has now lasted for over a month and currently sits at 37bpts, as the 2-year yield sits at 3.05% while the 10-year yield sits at 2.68%. Given that this signal has been a prelude to every recession in the US since 1950 (within the space of two years), investors are considering this extended inversion as a red flag moving forward especially given that it is increasingly growing.