There were three major surprises from three central banks yesterday.
BoE hikes 50bp, peak rate seen unchanged past 6%
The Bank of England’s (BoE) decision to step up the pace of rate hikes at the 13th meeting since the start of the tightening policy has been broadly unwelcomed from households, to bond and stock investors, and to FX traders.
The 2-year gilt yield stabilized above the 5% mark, yet didn’t take a lift on doubt that the BoE could hike by another full percentage point without wreaking havoc across the British economy, especially in the property market. The 10-year yield fell on the morose economic outlook. At this point, it would be a miracle for Britain to avoid recession, and even a property crisis.
The FTSE 100 slumped below its 200-DMA, and tipped a toe below the 7500 mark. Trend and momentum indicators are negative, and the index is now approaching oversold conditions. It is worth noting that falling energy and commodity prices due to a softish Chinese reopening didn’t play in favour of the British big caps this year. The rising rates step up the bearish pressure. The outlook remains neutral to negative until we see a rebound in global energy prices – which is not happening for now.
The pound fell as a reaction to the 50bp hike. You would’ve normally expected the opposite reaction, but the bears remained in charge of the market, pricing the fact that the dark clouds that are gathering over Britain will destroy more value than the higher rates could create.
In summary, it was a disastrous week for Britain. But at least one person didn’t get discouraged by the data and the BoE hike, and it was Rishi Sunak who said that the British economy is ’going to be ok’ and that he is ‘100% on it’.
He is not scared of being ridiculous
Moving forward, the Gilt market will likely remain under pressure, the longer end of the yield curve will do better than the shorter end. The British property market will be put at a tougher test, and could crack under the pressure at any time, in which case the economic implications would go far beyond the most pessimistic forecast. And any government help package to help people go through higher mortgage costs would further fuel inflation and require more rate hikes. The outlook for pound weakens and the FTSE100’s performance is much dependent on China, which is struggling with low inflation and sluggish growth on the flip side of the world. Long story short, there is not much optimism on the UK front.
Elsewhere, the Swiss National Bank (SNB) raised by 25bp as expected, Norges Bank surprised with a 50bp hike, said that there will be another rate hike in August, while Turkey hiked from 8.5% to 15% vs 20% expected, raising worries that Turkey’s new central bank team could not shrug off the low-rate-obsessed goventment influence. The dollar-try spiked above the 25 level, the highest on record, but not the highest on horizon.
Consume less
The US existing home sales came in better than expected, adding to the optimism that the US real estate market could be doing better after months of negative pressure. The surprising and unexpected progress in US home data is welcomed for the sake of the economic health, but a strong housing market, along with an unbeatable jobs market hint that the Federal Reserve (Fed) will keep hiking rates. Powell confirmed that there could be two more rate hikes in the US before a pause at his semiannual testimony before the Congress, while Janet Yellen said she sees lower recession risks, but that consumer spending should slow.
The US dollar rebounded on hawkish Fed expectations.
