Enough?

Market report

Largest increase in UK base rates in 33 years from the Bank of England follows yet another ‘jumbo hike’ from the US Federal Reserve.

CIO view

Central bankers were again at the centre of a cluttered and unruly macro-economic stage this week. Short interest rates continue to be cranked higher in historic increments with few signs yet that inflation is ready to lie back down. This week, we examine some of the differences between the US and UK in their fight against epochal price pressures and speculate on what lies ahead.

US

The US economy still sets the beat for the rest of us. The world doesn’t have an official central bank, but if it did, it would be the Federal Reserve. From the primacy of the US consumer as a single decisive slug of demand to the proportion of global trade in US dollars, the US rules the economic and capital markets world. As we have pointed out before, we are in the somewhat surprising position of needing US economic growth to slow. Bad news is both good and unfortunately still in short supply. Today's messy US unemployment data does little to contradict the idea that demand for workers continues to swamp the available supply of them. Leading indicators are weakening a little, but likely not quick enough to allow central bankers much breathing space.

Even so, the meatiest part of the interest rate rising cycle is likely now behind us. Interest rates have gone from extremely accommodative territory to likely restrictive at breakneck speed. Much of the job now is waiting for the gathering effects of that tightening to show up and ultimately cool price pressures. There are surely more interest rate rises ahead, however the pace should start to slow and the capital markets’ carnage moderate with it.

Another US and global recession is the most likely price in the quarters ahead. That is still not adequately factored into either forecast corporate earnings or indeed market pricing in our opinion. This latest corporate earnings season has certainly fired some important warning shots – some of the seemingly impregnable tech titans have reported sharply slowing revenues – however there is likely a lot more to come. However, while stocks may have further to fall into the year end, our hunch is that the worst for bond investors is likely behind us. We are positioned in our short-term tactical portfolio accordingly.

UK

For the UK, the story is very different of course. Growth going into this latest inflationary episode was meeker and the exposure to the energy and food price shock from Ukraine unfortunately much greater.?As the Bank of England pointed out this week, the UK is likely already in recession. Now it is a matter of how deep and how long. Remember again that only the fools are confident when it comes to forecasting the short-term outlook. The UK still has much going for it beyond this necessary slump. From institutions to incredible universities and a capital city (and others) to envy, we should ignore those who only see decline ahead.

However, the shorter term is undeniably tougher. Policy makers, as elsewhere, will have to continue to try and reconcile the often contradictory demands of the electorate. This will have to be achieved whilst rebuilding recently diminished fiscal credibility. The incoming Autumn statement promises to be a delicate balancing act for this latest conservative administration.

Investment conclusion

Tougher times ahead is the now familiar message. For those looking for a little sunshine in amongst the gathering gloom, we can make a couple of hopefully familiar points.

First, capital markets now have a better handle of this gloom than they did only a few months ago. We are not quite there yet in our opinion, but we are a lot further along. From a longer term perspective, the valuation of stocks and bonds in particular suggest materially higher expected returns for investors weighing up entry than at the beginning of the year.

Second, always keep in mind that the apparent chaos of the moment is mostly not that important with regards to your chances of hitting your medium to longer term investment goals. That will be driven by the world’s success (or failure) at inventing new stuff and getting better at using that new stuff. There we have very good cause to be optimistic. We have been in a dry spell globally (and particularly in the UK) for productivity growth this last decade or so, for a range of reasons. However, for the world, that dry spell is likely ending. Countries and investors need to be braced and positioned accordingly.?

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*This article is for information purposes only. It is not intended as a product offer or investment advice