Week ending 27th May 2022.

Our view that central banks don’t need to aggressively increase interest rates is starting to sound much less controversial as global economic growth is showing signs of slowing.

PMI data releases disappointed in both the US and UK: the composite PMI reading for the UK fell to 51.8 in May – not only was this down from 58.2 in April and well below economist expectations of 56.5, but it is only just above 50. 50 is the line separating expansion and contraction, and while this reading was above 50, signalling that the UK economy is still growing, the rapid deterioration clearly demonstrates why we have been warning that the UK economy can’t tolerate aggressive monetary tightening.

The US composite PMI data painted a similar picture of economic slowdown with a reading of 53.8, versus 56.0 in April and economist expectations of 55.7.

Additionally, April’s US new homes sales data came in at 591,000 – well below economist estimates of 748,000 and March’s 763,000 reading.

The minutes of the last Fed monetary policy meeting (held on 4 May 2022) were released on Wednesday (25 May 2022) and reading between the lines, we believe that while policymakers will increase US interest rates by 0.5% at their next two meetings (15 June 2022 and 27 July 2022), there is a strong chance that they will then stop for a breather.

Consequently, we believe that Fed policymakers may have finally realised that inflationary pressures have not only peaked, but are also starting to negatively impact demand, and as such if they aggressively increase interest rates they could trigger a recession.

Accordingly, financial market pricing of future interest rate increases has started to subside – and as you can see from the accompanying table, this has been very positive for global equity markets.

Likewise, for the UK we have previously argued that the inflationary squeeze would weaken consumer confidence and spending, which would quickly put a stop to the BoE’s interest rate increases.

However, as John Maynard Keynes is believed to have said:  “when the facts change, I change my mind – what do you do, sir?”, and given yesterday’s (Thursday 26 May 2022) support package from the Chancellor of the Exchequer, Rishi Sunak, our view will now have to change as unfortunately, what Rishi Sunak giveth, the BoE is likely to taketh.

This is because the support package will mean that: one, the UK economy will be more resilient than it would have been otherwise and, two, UK inflation will be higher – both of which now make it more likely that BoE policymakers will again increase interest rates!

Looking ahead to this coming week, US markets are closed on Monday (30 May 2022) for Memorial Day, while UK markets are closed on Thursday and Friday for the Queen’s Platinum Jubilee celebrations.

Consequently, it is a relatively quiet week for economic data releases.  Of most interest to us will be US consumer confidence; US ISM; US employment data (non-farm payrolls; unemployment rate; participation rate; and average earnings); Eurozone CPI; Chinese PMI; Japanese unemployment; and Japanese industrial production.

Investment Management Team