October 28 2022A number of central banks have held their latest meeting to set interest rates. The ECB acted in line with expectations, increasing its policy rate by 0.75% to 1.5%. The ECB also offered hints as to the future direction of its rate setting. Whilst further hikes are expected to combat inflation, which is still deemed as being too high, the central bank suggested that pace of rate hikes may be slower moving forward. This could perhaps be signalling a 0.5% move at the next meeting rather than one of this magnitude.
This would echo a move seen by the Bank of Canada this week, where they raised rates by 0.5%, taking the base rate there to 3.75%. This was smaller than expected a move to 4% having been forecast. The governor of the bank stated that they were “getting closer” to the end of their tightening cycle, although they were “not there yet.”
This also follows a move by the Reserve Bank of Australia earlier in the month who raised the cash rate by 0.25% compared to an expected 0.5%, although further hikes are still expected. We have no doubt however that they will have their eyes closely fixated on inflation figures, especially after a higher than expected figure for Q3 released this week, which showed inflation rose 7.3% year on year against a consensus forecast of 7%.
In the US we need to wait until November for their next interest rate decision. Goldman Sachs forecast a 0.75% hike next month. After this they forecast that the US Federal Reserve will also slow their pace, expecting a 0.5% hike in December and then a 0.25% hike in February next year, taking the Fed Funds rate to the 4.50-4.75% range.
So far this year Bank of America calculate that we have seen 243 interest rate hikes, which equates to more than one hike per trading day. Having been accused of being too late to the table, we envisage that central banks will be reticent to take the title of being too early to remove a tightening policy at a time when inflation is still all around us. The latest to bow to pressure was Tesco, who have announced that their lunchtime meal deal will rise in price from £3.50 to £3.90, an 11.42% increase. Even the coveted Clubcard holders will see a rise of over 13%. This is the first time they have imposed a price rise on this line in the last decade. Where will Doug get his lunch from now?
Whilst these interest rate hikes are clearly needed, we have no doubt that governments are cringing at what this is doing to the level of interest payments due on their outstanding debt. The increase in the refinancing rate, coupled with the larger debt levels, means that in the US alone we have seen hundreds of billions added to the interest bill.
Here in the UK the bond market appears to have taken kindly to the appointment of Rishi Sunak as Prime Minister. On the 21st October we saw a yield of 4.03% on the 10 year gilt. At close on the 27th however the yield stood at 3.45%. It would therefore appear that markets believe that Sunak has a tighter rein on the purse strings, which complements the Bank of England’s tightening monetary policy as it looks to bring inflation under control. Sunak has also warned that tough decisions lie ahead as he embarks on tackling rising debt levels, whilst being very conscious that he has a slowing economy to deal with to.
Sterling also appears to have been a beneficiary of Sunak’s appointment. Having got close to parity with the US dollar there has been a recovery back to the $1.15 level. One area where a weaker pound has been a benefit has been UK equity dividends. The latest Link UK Dividend Monitor, covering the quarter to the end of September, boosted dividends by £1.9bn, due to a number of companies reporting theirs in US dollars, therefore benefitting from currency translation. Share prices at the end of September, coupled with a stable outlook for dividends, leads to a forecast yield of 4.2% for UK equities for the next 12 months, 4.3% for the FTSE 100.
Finally, we are now into reporting season in the US and so far there have been some casualties, none more so than Meta, formerly known as Facebook. After reporting a quarter of declining revenues the share price was significantly punished. Zuckerburg, the company’s founder, also warned that the company faces near term revenue challenges as it concentrates its efforts, although in the long run he believes that the fundamentals are there for a return to stronger revenue growth. After approaching nearly $400 a share in September 2021, the share price is back to the beginning of 2016 levels. For now, it appears reality isn’t convinced with virtual reality.
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