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| | Hi Friend,
Inflation Set To Fall ... Interest Rates Set To Follow ...
Bond yields rallied, Sterling slipped against the Dollar this week. The latest US inflation suggests CPI is heading higher. Analysts are beginning to rethink, the forward outlook for US interest rates and the actions of the Federal Reserve.
It doesn't take much to spook markets. Uncle Sam's CPI inflation increased to 3.2 per cent in February from 3.1 per cent prior month. Producer prices increased to 1.6 per cent in February, up from 1 per cent in January and 0.8 per cent in November last year.
Markets moved. Ten year bond yields increased to 4.31% in the U.S. and 4.10% in the U.K. Sterling slipped from $1.29 to $1.27. When it comes to understanding market moves, "Any explanation is better than none" (Nietzsche).
In the U.K. We won't have to wait long for an update. The MPC is set to meet this week. A decision on UK rates due Thursday. The latest inflation data is due on Wednesday. This will give some steer to the direction of travel on prices and base rates.
So what to expect? Market forecasts suggest consumer price inflation will have fallen from 4 per cent in January to 3.5 per cent last month. This, on the back of slowing food and energy prices. Core inflation, excluding food and energy, is expected to have eased from 5.1 per cent to around 4.5 per cent.
Strong disinflationary pressures and tight monetary policy may cause inflation to fall below the 2 per cent target this year. The Office for Budget Responsibility produced new forecasts this month. They indicate inflation will hit the 2 per cent target in the second quarter and will stay below target for the rest of the year, ending the year at 1.4 per cent.
The Bank of England forecasts suggest inflation will hit the 2 per cent target in the second quarter but inflation is expected to rise in the second half of 2024. Inflation will end the year a 2.8%, meeting the 2 per cent target only in 2025, the Bank said.
Falling food prices and energy costs the critical drivers. Intervention of the Ofgem price caps of great assistance in April.
The rosy coloured outlook for inflation may not be so easy to achieve. Oil prices Brent Crude averaged $83.48 dollars in February compared to $82.59 last year. Prices averaged $75 dollars in May and June 2023. The latest earnings data suggest whole economy earnings were 5.6 per cent in January (6.1 per cent excluding bonuses). Moving in the right direction but as yet incompatible with the 2 per cent target. Service sector inflation, accounting for almost half the index, increased to 6.5 per cent in January, up from 6.3% in November.
So we await with interest, the February figures for inflation. Some steer on what happens next with Base Rates may then follow.
Bank of England Interest Rate Decision ...
There is little or no expectation the Bank of England will lower rates this week. Rates on hold the probable decision. The only excitement, the voting mix, "stick or twist". As David Smith writing in the Sunday Times this week points out ...
"It is now more than seven months since the MPC last changed interest rates.. It would be a big surprise if there is not another hold this week. That does not mean that there will be no interest in Thursday's decision. Last month, one member of the committee, Swati Dhingra, voted to cut, while two members, Catherine Mann and Jonathan Haskel, voted to raise rates. The other six were happy to leave things unchanged.
Some of the speculation this week is therefore, whether anybody else joins Dhingra in voting for a cut rates, which at this stage is considered unlikely, and whether Mann and Haskel throw in the towel on further rate rises."
So when will there be a cut in rates?
Following this week's meeting, the MPC will have five more meetings and five more opportunities to cut interest rates this year. Markets think May is too early. June is favoured for the first cut of 25 basis points.
August, September, November and December are the remaining meetings scheduled this year. December too close to Christmas. November too close to an election, if he makes it that far!
We anticipate base rates at 4.5 per cent by the end of the year. That would suggest rates cuts possible in August and September but not much more to follow in 2025 .
In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5%.
As always, "'The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals." Oops, that's the Fed, not the Old Lady, talking.
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| | The Sword of Damocles ...
OBR Penny Mordaunt's ambitions to one day lead the Conservative Party are, according to her colleagues, an open secret.
This weekend her ambitions were thrust into the spotlight once more after some right-wing Tory MPs claimed they were warming to the idea of her as a replacement for Rishi Sunak.
Mordaunt, 51, has told friends that she is not manoeuvring and has no interest in pushing for the leadership. Well she would say that wouldn't she!
The Sword of State carried at the Coronation begins to look like the Sword of Damocles ... and she won't need painkillers for this one ...
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| | That's all for now. Have a great week ahead ...
John
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| To understand the markets, you have to understand the economics ...
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© 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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