August 5 2022
First and foremost, a huge congratulations to the England Lionesses for bringing football home after a very, very long wait! Something we might be a little bit more reticent to bring home however is the nation’s favourite cheeseburger after Mcdonald’s announced last week that it would see its first price increase in over 14 years. It wasn’t just a small increase either, with a 20% hike being imposed. The company is also to pass on the cost of higher fuel and ingredients onto other items on their menu. Whilst this is to be expected, it is a further example of how the cost of living for the consumer is rising across the piste. Are new permanent pricing points being permanently set? In the US, we are already seeing a sharp rise in the amount outstanding on credit cards as the higher cost of living continues to bite.
Also in the headlines was the US Federal Reserve which, as expected, raised rates by a further 0.75% to 2.5%. This takes it back to its 2019 level but is still some way behind previous peaks. Although the Committee commented that ongoing increases will remain appropriate, it was also said that the extent of such will be data-dependent. At the same time, they also commented that they were prepared to adjust their stance if risks were to emerge that would lead to them not attaining their goals.
Whilst interest rates are still expected to rise throughout this year, the market took the comments, along with the removal of forwarding guidance, as being more dovish than expected. Long-dated Treasury yields as a consequence fell and at the time of writing the 10-year yield is at 2.66%. Shorter dated yields, however, remain anchored to short-term rate expectations, leaving the 2-year Treasury yield at 2.90%, the 10-year – 2-year Treasury yield curve therefore firmly inverted. The implied end-of-year Fed Funds rate now stands at somewhere between 3% and 3.5%, with c. 0.75% of interest rate cuts expected in 2023.
Longer duration bond investors appear to expect that there will be a partial reversal of rate hikes next year, driven by a weakening economic outlook. The US economy shrank at an annualised rate of -0.9% in Q2. Following a -1.6% contraction in Q1, the US economy has technically entered a recession, which is defined as two consecutive quarters of negative growth. As yet the powers that be seem a little reticent to call it so, particularly given the strong labour market which we continue to see. That does not mean that authorities cannot go back and redefine when they believe a recession began.
The perceived more dovish tone also meant we saw a rise in equity markets, in particular growth stocks, with the Nasdaq up almost 5% on the week. The debate, for now, remains as to whether we have now seen something of a pivot point from the Federal Reserve. For some, the lack of forwarding guidance suggests that we have. For others, it remains too early to call, especially with the Federal Reserve likely to keep raising rates until they are sure they are on a clear trajectory back to 2% inflation. That appears a little too premature to call right now.
In Europe, where economic growth expectations are perhaps deteriorating a little quicker than elsewhere, we have now seen the Germany 10-year bund yield nigh on half from its mid-June high point.
The latest International Monetary Fund (IMF) growth predictions have been released and here they predict a marked slowdown for advanced economies in 2023. Whilst they forecast 2.5% for 2022 they see only 1.4% growth next year. Here they expect the UK, Germany and Italy to be laggards. Emerging market and developing economies meanwhile are expected to fare better, with stronger growth, in aggregate, expected in 2023. China in particular is expected to see a notable improvement this year.
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