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Saturday 7th October 2023
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| | Hi Friend,
Mary and I were in London this week. The trip as part of a series of events, with Praetura. Praetura Group is the Manchester based financial services company specializing in lending and equity solutions for startups and SMEs. Dave Foreman MD, one of the founder members was presenting, a number of invested companies formed part of a fascinating panel. I opened the session with a thirty minute round up of the UK and World Economy. Lot of discussion about inflation and interest rates especially in view of the "Bond Market Mayhem" in the U.S. this week, but more on that later. Our trip did not get off to a great start.
Traveling from Lancaster to London, the scheduled train was cancelled. The next available train was overcrowded. The train eventually arrived in Euston, thirty minutes late. We were held up in Warrington station. Someone pulled the emergency cord. The pressure of the trip from Glasgow, too much perhaps. One guy just couldn't take any more. For him, the remainder of the trip to London was scrapped.
Rishi Sunak's speech in Manchester came to mind. He had done a lot of scrapping this week, including HS2. News of the Sam Bankman-Fried trial filtered through, the FTX boss had stolen over $10 billion in an "Empire Built on Lies", the jury was told. This as nothing.
Rishi Sunak had stolen almost $50 billion dollars from the people of the North in his speech. The promise of a ten billion dollar spend on potholes, evidence of myopia and misdirection, offering little comfort. No high speed rail, a ban on cigarettes, the promise of mathematics into the future the greater vision. For some it gets worse.
If you've been struggling to find Walkers Worcester Sauce crisps, there is bad news. Walkers confirmed the derivative has been scrapped. Walkers has not confirmed why the decision was made. Rumours are circulating of an intervention by Number ten. Fans have flocked to Twitter to lament the loss. One said: "Walkers sacking off Worcester sauce crisps is absolutely criminal, as if the damage hadn't been done enough by getting rid of beef and onion." The Tories are blaming Labour for that one. Yep that and the tax on meat.
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| | Bond Market Mayhem ... Base Rates Higher For Longer ...
Wall Street had expected 170,000 jobs to be created in September. The U.S. economy added 336,000 jobs, more than double the level economists had expected. The data underscored just how much strength remains in the labor market despite the Fed’s campaign to cool things down. Job growth for both July and August was also revised upward, showing a combined 119,000 more jobs had been created than previously reported. Unemployment remained steady at 3.8%. Earnings eased back in the latest data.
Forecasts for growth in the U.S. have now been upgraded to over 2%. The good news on inflation continues. The bad news, the markets assume the Fed will hike rates further in November. We had always assumed a 25 basis point hike was coming before the end of the year.
Mayhem in the bond markets? Not really. Ten year bond rates increased to 4.8% from 4.6%. Thirty year gilts closed just under 5% at 4.96%. Short rates three months, closed at 5.5%. Markets are conditioned to expect rates to be higher and for longer than expected earlier in the year. We have long warned of this, in the adjustment process to life after Planet ZIRP
In the U.K. ten year gilts closed unchanged at 4.6%. 30 year gilts closed up 13 basis points at 5.05%. Six month rates were at 5.5%. One year rates eased back to 4.9% from 5.15%.
No mayhem involved. The yield curve is normalizing. No mayhem involved. The yield curve is normalizing. 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%. Thirty year gilts averaged 4.6%, real GDP growth averaged 2.5%, earnings averaged 3.5% and the unemployment rate averaged 5%. So what happens next in the U.K.?
We expect a further 25 basis point rise before the end of the year. Base rates rising to 5.5%. Rates then on hold, this could be it for the cycle. The Bank will be keeping a close watch on earnings. Wages increasing at over 6%, is just not compatible with a 2% CPI target.
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| That's all for this week! Have a great weekend,
John
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| To understand the markets, you have to understand the economics ...
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