Weekly Update 25th June – By Andrew Milligan

MUNIX COMMENTARY Friday 25th June

A central banker has such a busy life!

A central banker is a very busy person. Alongside the set piece events, such as quarterly forecasting rounds and monthly decision making meetings, there is a steady round of speeches to make to businesses and economists. This gives policy makers the opportunity to fine tune market reaction and sentiment, or correct perceived errors in how the press are interpreting events. One of the past masters of the situation was Alan Greenspan, a predecessor of Jerome Powell as Fed Chairman. Two quotes attributed to him are:

“I know you think you understand what you thought I said , but I’m not sure you realize that what you heard isn’t what I meant”

and

“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I said.”

The Fed was out in force after last week’s FOMC policy meeting, which had been seen as more hawkish than the markets expected. Bullard initially added fuel to the sell-off by indicating that he could see a rate rise in the USA as soon as late 2022. Kaplan was concerned about rapidly rising residential property prices; he is also a fan of taking the central bank’s foot gently off the monetary accelerator sooner rather than later. However, the New York Fed’s Williams, an important signaller, was more sanguine and Powell reiterated “We will not raise interest rates pre-emptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances”. All in all, oil was poured on troubled waters.

What about closer to home? This was a week when the MPC met. As widely expected, they left policy on hold: no change on rates and another 8-1 vote to keep QE intact. Little has altered in the UK economy: it continues to recover as the lockdowns come to an end. Forecasters are growing more confident about GDP growth in 2021-22; as one example of the upgrades, Deloittes now suggest the UK will expand by 7.5% this year, about 1% higher than their previous estimate, to be followed by 5.2% next. That would make the UK one of the fastest growing economies in Europe, having suffered one of the largest contractions last year of course. However, the Bank remains convinced that inflation will not remain above target for long, that dis- inflationary forces remain strong in the economy.

It is not alone in such views. At the ECB, Chief Economist Lane, the official voice on their economic thinking as Christine Lagarde is not an economist, signalled that the ECB is unlikely to have sufficient data to change its policy stance at the September meeting.

Almost all central bankers argue that inflation will be transitory. There are honourable exceptions, such as Andy Haldane warning that the UK faces its “most dangerous moment” for inflation since 1992. However, he steps down from the MPC in a few days, whilst the next most hawkish member, Gertjan Vlieghe, leaves in September. Hence, the first speeches from his replacement,

Dr Catherine Mann, will be read with great interest. Where does she stand on the ‘doves vs hawks’ scale?

All in all, the UK gilt market looks likely to remain in its trading range. Investors will react to the twists and turns of the economic data over the summer, but central bankers are in watch and wait mode, using their speeches to steady the ship whilst they await the next big direction in the inflation cycle. .

Andrew Milligan is an independent economist and investment consultant. This note should be considered as general commentary on economic and financial ma;ers and should not be considered as financial advice in any form.