FEARS: The developed world’s highest headline inflation. Still rising core inflation. 19% food price rises. 12 central bank rate hikes. And investors aggressively pricing four more to come. Falling house prices. This is the unfortunate position of the UK today. And the world is watching, with this predicament the one other policy makers and global investors fear the most. Especially with Canada and Australia recently reversing course and restarting rate hikes, and investors continuing to ‘fight the Fed’. The only silver lining is the relatively sanguine market reaction so far. With Sterling surging, and the FTSE 100 index underperforming rather than capitulating.
WORLD: This UK nightmare of stalled inflation, ever higher interest rates, a stuttering property market, and rising recession risks, has the whole world watching. After both Canada and Australia were also forced to surprisingly raise interest rates again with inflation high and sticky. And as investors continue to ‘fight the Fed’ which is forecasting two more US interest rate hikes. Some version of this story is the worst-case scenario for investors. Of higher-for-longer interest rates and a central bank that cannot respond to a recession by cutting rates with inflation sticky.
UK: Two year and five year bond yields, that drive UK mortgage rates, have soared (See chart). They are now above levels of November’s Trussonomics ‘mini-budget’ disaster when the Bank of England had to intervene to support the bond market. The only silver lining is this has made Sterling the world’s best performing major currency this year, up 6% versus the US dollar. This is helping to cool imported inflation and making overseas travel cheaper. Whilst higher interest rates have been a boost to savers. The benchmark FTSE 100 has sharply underperformed recently with this macro angst but is still up for the year. A welcome sign of some resilience.
All data, figures & charts are valid as of 20/06/2023.