It feels as if an awful lot happened last week. In fact, the important parts were two things that did not happen. Neither the Federal Reserve nor the Bank of England raised interest rates. And hurray for that. The reaction of the markets to the two non-events, however, is intriguing.
I have, of course, over-simplified the inactivity. Jay Powell, the eminent Chair of the Federal Reserve, was at great pains to stress that they may well wish to squeeze in another rise in interest rates before 2023 is through. And in addition, anyone who thinks that they may cut rates next year can jolly well go and boil their head. The markets have taken Powell at his word, with the result that US bond yields have risen even further, while equities had a nasty bump downwards.
The passivity of the UK’s Monetary Policy Committee was a surprise. The vote of the Committee was a tie at 4-all, with the Governor giving the casting vote in favour of sitting on their hands. The accompanying explanation was of a different tone to the Fed, being mostly an honest admission that they really do not have a great deal of conviction in any forecasts of how the next months are likely to play out.
And now I have over-simplified my explanation of my previous over-simplification. There are wider forces at play here, and we can link in Rishi Sunak, net zero and HS2. Western governments and central banks face a number of common challenges. First, the banks are trying to flog off the bonds that they bought during the era of quantitative easing. That is a challenge in itself. Then there is the need of governments to refinance a steady stream of maturing issues of gilts and treasuries. We have long argued that this second point was never an issue while yields remained at or very close to zero. It is rather more of a problem when the cost of issuing debt is nearer to 5%.
The mix is further complicated by budget deficits: when governments spend more than they earn. The United States has to fund the ironically named Inflation Reduction Act. In the UK, we have to find a way to pay for the northern half of HS2. The weekend’s rumours of the cancellation of this may yet prove to be double-bluff, and the upcoming party conference may give a joyous reception to the news that “we have listened to all the feedback and have decided that it is right to go ahead with keeping our promises”. Perhaps.
It is only a few weeks since we predicted the ditching of the 2030 target for electric and hybrid car sales, so that announcement comes as no surprise to us. Mr Sunak’s green credentials have long appeared to us as, may we say, weak. Government-funded carbon reduction is an easy target for ‘prudent’ spending cuts in what is clearly the start of the general election campaign (my, we are going to be so bored of this by the time the election actually happens). Without appearing to be too political here (as climate has very definitely become a tool of those seeking votes), I can only reiterate my absolute conviction that carbon reduction targets around the world are not going to be met and that we have to expect extreme weather.
This is where carbon emissions behave in broadly the same manner as government debt. Governments run budget deficits: the national debt of almost every country rises each year. All that changes is the pace at which this happens. Carbon is precisely the same. With the exception of the covid-lockdown years, the world emits more carbon every year. All that changes is the pace at which this happens (it feels as if this is a sentence I have typed before).
The end of the week also marks the end of the quarter. Most equity and bond markets have moved little over the three months as a whole. The one asset that stands out like a thumb attacked by a bullet ant is oil, where the price has risen by around a quarter since the end of July. Like said hexapod, this may yet have a sting in its tail.
Finally, well done to the few who knew last week’s line from Doctor Feelgood’s ‘Down at the Doctors’ and the Steely Dan lyric from ‘Only a Fool Would Say That’. Today, it is tempting to use the too-easy ‘It’s late September and I really should be back at school’, so instead we return to lines so good they were written twice: “But I’m proud of you. But I’m proud of you”. OK, it’s not that good, but which early 80s classic is this? Steely Dan-wise, we go with the topical “They may fix the weather in the world, just like Mr Gore said.”
Jim Wood-Smith – Market Commentator and Head of Climate Transition
FPC 1251
All charts and data sourced from FactSet
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