Ear to the Ground

April 21 2023

Further interest rate hikes were back on the cards in the UK after stronger than expected UK inflation data.  Firstly we had average earnings figures where, excluding bonuses, we saw a 6.6% increase, year on year.  This was the same as the previous period but above the consensus forecast of 6.2%.  The same but this time including bonuses was also higher than had been expected, coming out at 5.9%, which was above the consensus forecast of 5.1%.  The largest wage increase was in the private sector, where regular pay grew 6.9%, whilst the public sector saw a 5.3% increase.

The consumer price inflation rate to March meanwhile posted a year on year increase of 10.1%.  This was down from the previous reading of 10.4% but higher than market expectations of 9.8%.  The main inflationary pressures came from food and non-alcoholic beverages.  Core inflation also remained elevated at 6.2%, only 0.3% below the recent peak and above the consensus forecast of 6%. 

These figures could place the Bank of England under something of a predicament.  Does it look to keep raising rates to tackle what appears to be sticky inflation, or are they comfortable that the level and pace of increases which we have already seen will be enough.  Market expectations are that we will see a further 0.25% increase and possibly another after that.

In the US, meanwhile, the focus was more on the outlook for growth rather than inflation.  Here we saw the release of the Philadelphia Fed Manufacturing Index which fell to its lowest reading since May 2020.  It was also considerably weaker than the market consensus forecast of -19.2. 

Looking back over history, each time the index has reached a level as low as this, the economy was either in or approaching a recession, looking at data going back to 1970 (Source: Creative Planning/Y Charts).  Whilst the market still anticipates that there could potentially be further rate hikes in the US, this perhaps adds fuel to market expectations that the Federal Reserve could be cutting rates before the year is out.  Not a view shared by us, currently.

The release of the data we have discussed above should mean it perhaps comes as no surprise that we now see a higher yield on the 10 year UK Gilt than we do on the 10 year US Treasury, 3.78% and 3.54% respectively at the time of writing.  Moving forward it could perhaps mean the weakening of the US dollar, but it is perhaps too early to make that call

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