No end in sight for rate rises as inflation starts to fall

The noise

• The Federal Reserve raised rates by 0.5% as expected at the FOMC’s Wednesday meeting. Chair Jerome Powell says the central bank has more work to do to vanquish inflation but investors seem to see the outlook for 2023 differently. He stated that “We still have some ways to go” and “We will stay the course until the job is done.” The Bank of England followed on Thursday to raise interest rates by 0.5% to 3.5%, which is the ninth hike in succession led by the Bank’s monetary policy committee and the highest rate since 2008.

• The inflation rate fell from 11.1% to 10.7% last month in latest figures released by the Office for National Statistics and was lower than expectations. Falling motor fuel prices led the decline in the Consumer Price Index with the largest contributor to it was rising prices in restaurants, cafes and hotels largely led by alcoholic beverages.

• The gap between wage growth in the public and private sector is at a record high according to the Office for National Statistics. Private sector workers saw their average pay rise by 6.9% between August and October in comparison to 2.7% for public sector workers. Nurses staged their first nationwide walkout this week along with thousands of other workers.
   

The numbers

The nuance

Central banks continue to increase interest rates with the US and EU chiefs signalling that more hikes are to come and no consideration is being given to the markets expectation of rate cuts next year.  Looking into 2023 we can expect the headline inflation rate to continue to decline as economic weakness provides some cyclical relief, however the consumers lost purchasing power will not be restored, it will just be eroded at a slower pace.  This is good news for bond investors, where higher expected returns look more competitive against falling inflation, but bad news for equities as revenues and earnings will struggle to grow and may fall as margins normalise and demand resets. 

The investment conundrum for 2022 has been how high will interest rates have to go and what is the correct normalised level for bond yields.  As we move into 2023 the investment conundrum may be whether or not inflation be brought down to 2% before the fight is abandoned to support growth.  So far central banks have joined the fight, but in order to win it they will need assistance from governments. Monetary policy can affect inflation from the banking system lending to consumers and businesses, but it is unable to impact the inflation driven by fiscal deficits caused by excessive government spending. Such spending remains at record levels despite the recovery in the economy.

From all of us at atomos, we wish everyone a very Happy Christmas and all the best for the New Year.

Quote of the week

“Wear it with pride, add it to your collection, use it to clean the windows… we don’t know”.

A chancer has been left with 18,000 “useless” T-shirts which wrongly herald England as World Cup champions, reported Sky News. Karl Baxter was so sure that England would win the tournament that he had the tops printed ahead of the quarter-finals. “England, Cup Winners 2022, It’s Finally Home” reads the slogan on the front, while the back is emblazoned with: “The Day It Came Home”.

But the gamble didn't pay off, with Gareth Southgate's side losing 2-1 to France in their quarter-final match on Saturday after Harry Kane missed the chance to score an equalising penalty.

"We had a load of blank football shirts that we bought a couple of years ago, which we had not done a great deal with, so I decided to take a gamble on the crest of the wave England were riding and get some shirts printed in anticipation of success," Mr Baxter, 46, told Sky News

In a message to customers on the website, Mr Baxter wrote: "We have reduced the price of these unique items as we certainly won't be getting any more. "So wear it with pride, add it to your collection, use it to clean the windows...we don't know.“

Source: Sky News, The Week