Weekly Market Update: BoE's Chief Economist dissents to put 2018 rate hike on table

Read our full Market Update Week 25

Market Update

Global stocks turned negative last week following two weeks of positive performance. Emerging Market equities were the worst hit, falling -2.0% in Sterling terms, as rising trade war fears also weighed on global equities, which were down -0.7%. Japan was also badly hit due to its reliance on exports, falling -1.7%. European and US equities returned -1.0% and -0.6% respectively, while UK equities bucked the trend, gaining +0.7% in part due to its high weighting in energy stocks. Energy was the strongest performing sector globally as Oil rallied +6.0%. The UK yield curve flattened somewhat last week as the MPC voted to keep interest rates on hold. However, three members voted for a rate rise, supporting the likelihood of an increase in the near term. So while the risk off environment saw 10Y Gilt yields actually fall -0.9 bps, 2Y Gilt yields rose +4.4 bps. Meanwhile US 10Y Treasury yields fell -2.6 bps and German 10Y Bund yields fell -6.6 bps in what was a positive week for global bonds. Sterling fell against most major currencies, with the Yen and Euro showing strength. Despite the risk off environment, Gold fell -0.8% in USD terms.

CIO Analysis

The Bank of England maintained interest rates as anticipated, despite an earlier signal that it would hike the cost of money in the UK.  Apart from Mr. Carney’s comments that rate rises are data-driven and not set in stone, markets focused on one unexpected dissent: Andy Haldane, who voted for a hike, marking the first dissent of a Chief Economist in seven years. What is this telling us?

a) Brexit is slowing the economy (1.2% annual growth and dropping), but things are not so dramatic as to keep interest rates floored forever.

b) In fact, messages on wages and employment were very optimistic, driving the implied probability for a rate hike in August from 42% to 68%.

Still, we remain watchful. On the one hand, investors and savers should get some reward for lending and pension funds need higher interest rates to meet their obligations. On the other hand, a 1% rise in interest rates could on average result in a 3.4% drop in disposable incomes for a generation of home owners who have never had to cope with rate hikes. The balancing act will be difficult, which is why those making predictions about the course of UK rates should be very careful.

David Baker, CIO