Multi-Manager People’s Perspectives

Closer to home we’ve seen the Bank of England hiking rates and scrapping its recession forecast for the UK economy.

In the US we saw the Senior Loan Officer’s Opinion Survey (SLOOS) updated. This quarterly survey of the banks highlights their willingness to lend and was hotly anticipated given the turmoil we have seen in the US regional banks this year. The headlines were not quite as bad as had been feared but the percentage of banks tightening credit standards still increased and the number of banks stating they were less willing to lend was in recessionary territory, albeit not at the levels witnessed during the Global Financial Crisis in 2008, or in the early 1990s and 2000s.

The report also highlighted slowing demand for credit – a function of the interest rate hikes we have seen over the past year. The Federal Reserve also updated their financial stability report. Since their last update, we have seen three of the four largest bank failures in US history, and market volatility in the US regional banks continues to suggest we have not seen the last of the problems. The Fed noted that “worries about the economic outlook, credit quality and funding liquidity could lead banks and other financial institutions to further contract the supply of credit to the economy”.

Yesterday saw the Bank of England raise rates by 25 basis points to 4.5%, the 12^th consecutive rate hike. The meeting took place against a backdrop of persistently higher than expected inflation, though consensus remains we will see a significant drop off in the pace of inflation in the second half of this year, thanks to last year’s sharp rises in energy prices falling out of the annual comparison. UK inflation for March was 10.1%, well above the Bank of England’s own forecast of 9.2%. The bank remains likely concerned over ‘second round’ effects of inflation – essentially a wage-price spiral, but still believes that inflation will fall “materially below the 2% target in the medium term”. The minutes of the meeting noted “repeated surprises about the resilience of demand, while the labour market had remained tight”. The bank no longer expects a recession this year, but their growth forecasts remain anaemic – 2023 is expected to see economic growth of 0.25% while 2024 and 2025 are expected to see 0.75% growth. Markets are anticipating further hikes from the Bank after Governor Andrew Bailey repeated the key line from the minutes: “If there were to be evidence of more persistent pressures then further tightening of monetary policy would be required.” A 25-basis point hike in June is a 78% probability according to pricing data on Bloomberg.

The economic data has seen the US reporting monthly employment and inflation numbers for April. For the 13^th consecutive month, the non-farm payrolls were higher than expected, with 253,000 new jobs created. The unemployment rate fell back to 3.4%, the lowest level since 1969. The wages growth data will give the Federal Reserve some headaches, with month-on-month growth ahead of expectations at 0.5%. Year on year the rate was 4.4%, a fair way above the 3% level Fed chair Jay Powell has previously said would be consistent with the Fed’s 2% inflation target.

There’s little doubt that this was a robust jobs report and while the US labour market is cooling at the margin, the strength suggests wage pressures will persist until the economy weakens further and we see non-farm payrolls turn negative. US inflation was broadly in line with expectations, coming in at 4.9% year on year in April, the slowest pace of price increases in 2 years. Core inflation (which excludes food and energy prices) was 5.5%. Removing used car prices, which spiked higher, and shelter costs from the core data took the monthly pace of inflation to the lowest level since early 2021, and the markets saw the positive side of the direction of travel rather than focusing on the persistent strength of the overall numbers. This led futures markets to price in only a 2% chance of the Fed raising rates at their next meeting and a full 25 basis point cut in September.

China also reported inflation data, with prices rising by just 0.1% year on year in April, the slowest pace since early 2021. Such data highlights the reopening of the Chinese economy has not yet seen any inflationary impulse, and indeed such weak levels raise questions over the strength of the recovery. The Bank of China and government will need to react if the economic growth weakens after an initial reopening related boost. This morning we’ve seen first quarter growth data for the UK economy released, showing quarter on quarter growth of 0.1%, in line with expectations. Year on year, the UK economy grew by 0.2%. March saw a notable slowdown in activity, as retail and auto sales weakened, blamed on poor weather. If the Bank of England’s estimates for growth are accurate, weak levels of growth will persist all year, and beyond.

The debt ceiling continues to make headlines in the US with Treasury Secretary Janet Yellen warning the US could “run out of cash” as soon as 1 June. Yellen said there were “simply no good options” for solving the current stalemate, warning of an “economic and financial catastrophe that will be of our own making”. High level talks took place at the White House on Tuesday and are continuing at a junior level, but the situation remains that the Republicans want spending cuts to form part of the debt ceiling agreement, while President Biden wishes to discuss spending cuts only after the debt ceiling has been raised. After Tuesday’s meeting, Biden said “over these next few days and weeks, there’s going to be a lot of posturing, politics and gamesmanship”. The expected outcome remains a last-minute agreement, but we will see concerns grow in financial markets as June nears if both sides still appear to be far apart in their respective positions.

Likely Republican candidate (legal issues notwithstanding) in the next election, former President Trump, waded into the arguments on Wednesday, calling for a debt default in the absence of “massive spending cuts”. He dismissed concerns over the impact, saying “it’s really psychological more than anything else”. Janet Yellen, speaking at a G7 finance minister meeting in Japan yesterday retorted that a default could result in a global downturn and “dreadful consequences” if the debt limit is not raised. Yellen noted “the notion of defaulting on our debt is something that would so badly undermine the US and the global economy that I think it should be regarded by everyone as unthinkable… there is no good alternative [to raising the debt ceiling] that would save us from catastrophe”. Prepare for a noisy few weeks ahead in Washington DC…

Have a good weekend,

Regards,

Anthony.