A data dump to decipher
The financial markets faced a stream of economic data to analyse and interpret this week. At the end of the day, the net effect on bond yields in the USA and Europe was minimal – the news was already largely in the price. However, UK gilt yields did adjust lower, helped by signs that the economy is being affected by major headwinds, both domestic and from around the world.
It is still very possible that the Monetary Policy Committee raises interest rates next week – Catherine Mann signalled her support for doing so on concerns about ‘inflation persistence’. She will not have liked parts of the recent employment report, showing average pay as much as 7.8% higher than a year ago. However, much of this reflected one-off bonuses across NHS staff. Elsewhere, there were more signs economic stagnation. GDP fell 0.5% in July, and although the primary factor was bad weather affecting summer spending, the quarter on quarter GDP growth rate is only 0.2%. A slower labour market was reflected in the unemployment rate edging up to 4.3%, as employment fell at its fastest rate since 2021, whilst available vacancies were also lower. Looking into the autumn, demand for workers slowed for the second consecutive month according to a BDO survey, whilst a separate survey from the Recruitment and Employment Confederation said the hiring of permanent staff fell by the most since June 2020 last month, and spending on temporary workers fell for the first time since July 2020. Elsewhere, a Bank survey of chief financial officers showed less interest in raising prices. Indeed, supermarkets are cutting prices so the Institute of Grocery Distribution estimates that food price inflation will be 9% in December, down from 19% at its peak.
Weakness in the UK economy partly reflects weakness amongst its major European trading partners. Although the ECB did raise interest rates one more time to 4%, the tone of its language indicated there was a good chance the tightening campaign were near an end: “interest rates have reached levels that, maintained for a sufficiently long duration will make a substantial contribution to the timely return of inflation at the target”. The EU economy also looks to be flatlining into Q3, and few analysts expect a strong recovery into next year. A variety of forecasts from the ECB, the European Commission, and private sector economists surveyed by Bloomberg, all suggested that EU economic growth would be only about 0.8% this year and 1.0-1.3% next. Such weakness is expected to help bring inflation down; the latest ECB staff projections show headline inflation easing down to 3.2% in 2024 and 2.1% in 2025.
Analysts have been speculating for weeks that the Federal Reserve is also close to the peak of rates. Yes, economic growth and inflation both remain higher than some policy makers would like. The latest upbeat retail sales report tied in with forecasts that the economy might grow by 3% in Q3. Meanwhile, the latest inflation report reflected the recent upsurge in oil prices. The headline CPI figure for August jumped back up to 3.7%, with the core as high as 4.3% on the back of sustained service sector inflation. However, an article in the Wall Street Journal attracted considerable interest. It outlined conversations with Fed officials which suggested that the central bank will not move in September and has entered fine tuning mode, thinking that enough has been done albeit interest rates need to remain on hold for some time. When the Fed looks across the world and sees continued economic weakness in China, where headline inflation was almost flat from a year ago in August, as well as the lacklustre economic activity being experienced in the EU and UK, it is understandable why money markets are deciding that the peak in rates is almost there.
Bond yields at the time of writing
% 2 year 5 year 10 year
USA 5.01 4.41 4.29
UK 4.95 4.50 4.30
Germany 3.16 2.62 2.60
Andrew Milligan is an independent economist and investment consultant. This note is offered as general commentary on economic and financial matters and should not be considered as financial advice in any form.
Andrew Milligan an independent economist and investment consultant. From 2000-2020 he was the head of global strategy at Standard Life/Aberdeen Standard Investments, analyzing the major financial markets for global clients. He currently assists a range of organizations with reviews of their investment processes, advice on tactical investing and strategic asset allocation, and how to include ESG factors into their decision making