It is 53 years since the wonderful Ray Davies wrote that “it’s a mixed up, muddled up, shook up world”. His context might have been slightly different, but financial markets are in one of those silly phases where good news is bad news, and bad news is a cause for celebration. If you get my drift? I thought not, so let me explain.
We have argued through most, possibly all, of this year that markets need to see evidence that economies are struggling. In the face of the horrendous increases in interest rates hoist upon us by the Central Banks, markets need to see the proof that the medicine has worked before they can believe that the leech doctors have stopped applying the blood-suckers to our coursing veins.
We believe there is plenty of evidence that this is so, but that is a topic for another week. What we have just seen is a resounding raspberry blown at the revelation last Friday that the UK’s economy had a pretty decent June. The news that the economy might be in better fettle than was believed was met, if not quite by wailing and gnashing teeth, then certainly by the resigned misery that the Fun Police in Threadneedle Street may be even more inclined to believe that they need to raise interest rates yet further.
There are a couple of things that we need to consider here. First, this is August and markets tend to over-react during the holiday season. Second, it is, one might argue, bonkers to think that a couple of weeks’ decent weather should make an ounce of difference. It was hot and sunny in June, and we duly had a couple of extra barbecues and bought a few more tins of strong lager. As Ray Davies did not say, we were partying on a sunny afternoon. What do we think the odds are now that when we see the GDP calculations for a wet, sorrowful July, we will see comments of “oh dear, the economy was weaker than we thought”?
This week is meant to be relatively quiet. The scheduled exception to this is the UK’s monthly inflation update on Wednesday. July’s headline inflation rate is due to have taken a large step down, from 7.9% to 6.7%. As welcome as this is, the outsized drop largely reflects the benefit of the last month’s reduction in the energy price cap. So-called core inflation, which excludes energy and food costs, is predicted to be 6.8%, just a fraction down from June’s 6.9%.
Last week I was asked by one of our Investment Managers at one of our daily meetings what I thought it meant that the UK has a largely flat yield curve. Allow me to translate this for those not fluent in financial gobbledegook. Currently, there is next to no difference in the yields of gilts with maturities from three to thirty years. This is undoubtedly unusual. What is also unusual is that someone else answered before me, with exactly the answer I was about to propose. The most likely explanation is that the market, as a whole, has no idea what is happening in the UK’s economy, nor what the Bank of England will do with base rate. It is actually quite tricky to know which of those two is the cart and which the horse, but the distillation is that investors have been left clueless what the esteemed ladies and gentlemen of the Monetary Policy Committee will do next. And that is not ideal. Far from it, in fact.
We hope that the Wise People are enjoying a long summer holiday. The MPC’s next convention is not scheduled until 21st September. We hope that the next five weeks will give them time and perspective to realise that they have already done more than enough to cause considerable hurt.
Finally, congratulations to those who knew the lines from Mr Blue Sky and Reelin’ In The Years. Today, some holiday instructions from 1984: “Across the north, and south to Key Largo”. And we stay in Florida for the weekly Steely Dan: “Biscayne Bay”. Two brilliant earworms to help the week go by.
Jim Wood-Smith, Market Commentator and Head of Climate Transition
14th August 2023
Jim Wood-Smith – Market Commentator and Head of Climate Transition
FPC 1216
All charts and data sourced from FactSet
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