Ups and Downs
The first half of the month was about inflation and employment data.
Rising UK wages and a lower unemployment rate will give the Bank of England plenty of scope for another rate hike at next Thursday’s Monetary Policy Committee (MPC) meeting. Currently, the average interest rate on a two-year mortgage based on a 75% loan to value ratio, is 5.64%. Another UK rate hike will send that higher. To quote Adam Kay, ‘this is going to hurt’. In this case, the housing markets; especially with landlords liquidating their portfolios of rental accommodation.
US inflation data was a (lower) step in the right direction after May’s unemployment data, announced as usual on the first Friday of the following month, created a confusing picture.
As we have noted before, unemployment data can be something of a lagging indicator whereas money supply data and various sentiment surveys serve as better indicators of future economic activity.
Pause for Thought
Not unexpectedly, the US Federal Reserve chose to pause on its succession of interest rate moves that has spanned the past 18 months.
To us, this would seem to be a ‘prudent’ move, borrowing Fed Chair, Jay Powell’s choice of word. After the drastic action to catch up from over-loose monetary policy and regain credibility, the well-known lag effects of rate hikes on the economy may be biting into economic activity.
Perhaps the desire to regain credibility was behind the hawkishness of Powell’s accompanying comments which alluded to further Fed Funds rate increases, perhaps as early as July.
Unsurprisingly, the European Central Bank (ECB) chose to raise its official rate to 3.5%, the highest level for two decades. Yet ECB President, Christine Lagarde, said more rate hikes are on their way, as early as July.
Gilty as Charged
Bond markets have been weaker in June to date with the UK gilt market leading the way. Recent employment and wages data, and the prospects of a higher peak to UK official rates set by the Bank of England, have unnerved gilts.
As the following chart from Investing.com illustrates, ten year yields have now gone above where they were after the Truss leadership shenanigans. Of course, whilst you could argue that the current political situation remains unsettled – it’s not to the same extent as last autumn.
Source: Investing.com
Cracked China
The Chinese economic recovery has disappointed and its stock market reflects that. Earlier this week, official recognition of that materialised via a rate cut with the likelihood of further monetary stimulus ahead.
Rising Sun
One of our favoured markets/themes has been the corporate governance momentum in Japan which started under Prime Minister Abe. Having been a ‘why bother with it’ market for non-Japanese investors, it has appeared on international investors’ radar again. Consequently, with domestic demand adding fuel to the price appreciation, the Nikkei 225 index has risen above 33,000 – a level not seen for many years.
Japan is home to many world-leading companies who also have pricing pressure, not least due to a cheap Yen. Many would-be jobseekers might not be aware that Indeed and Glassdoor are part of Recruit, a Japanese company.
Source: Bloomberg
Your Money
There has been little change to portfolios in June to date. Bonds are becoming more interesting.
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