Client Update - 11th February 2022

A bumper jobs reports in the US has increased the possibility of higher-than-expected rate rises from the US Federal Reserve’s (Fed) March meeting, especially given todays inflation reading in the US hitting 7.5%. This come on the back of the European Central Banks (ECB) Christine Lagarde’s refusal to repeat the point she made in December about a rate hike this year being unlikely, while mentioning a “unanimous concern” about inflation in the Governing Council. This is a big shift. The ECB is now ready to follow the Fed with a first hike maybe only 6 months after the Fed’s first planned move in March. Interestingly, the Fed only became “Hawkish” on rate rises once wage data made it absolutely clear the US inflation problem was no longer transitory. The ECB is changing its stance before wage acceleration appears in the Euro area. The ECB’s pre-emptive stance suggests a sensitivity to inflation risks at odds with the cultural change imposed by Draghi during his tenure.

Financial markets are therefore still being bombarded by a steady flow of hawkish signals from all major central banks. On top of the Fed’s and now the ECB’s tougher rhetoric, the Bank of England, upon delivering another 0.25% hike this month, revealed that 4 members of its Monetary Policy Committee voted for a 0.5% rise.

If you can ignore the 9.4% dent in UK GDP in 2020, this morning announcement of UK GDP rising by 7.5% in 2021 (the highest annual figure on records back to the second World War) was welcome news. This was especially encouraging as data was also released showing that Omicron had not had quite as harsh an effect on December’s numbers versus analyst expectations.

Staying with the UK theme and the exploits of our embattled Prime Minister, it was interesting to read the appointment of Jacob Rees-Mogg as Minister for Brexit Opportunities. Despite the list of benefits that a Brexit would bring being much discussed in 2016 leading up the vote, not much of material benefit has been evident so far. Indeed, we now have a rise approaching in National Insurance contributions to help, amongst others, the NHS. I seem to remember several buses passing me in London in 2016 explaining how our European tariffs were going to be redirected to boost our public health service by £350m per week. Mr Rees-Mogg has a tricky task ahead of him as most of the benefits are surely incremental and finding positive news in any short-term scenario seems challenging. Having said that, any positivity that can help the Prime Minister at this moment in time would surely be welcomed.

Over the coming months, the challenges to real incomes are likely to dominate, with National Insurance increases and the utility price hike all expected in April. It is expected that the drawdown of savings accumulated over the pandemic will bolster consumption and help the economy tick over. It is indeed encouraging to see that Omicron did not have as significant an impact to the broad economy as many expected, so we move forwards into 2022 hopeful that central banks can get their decisions and rhetoric sensibly in proportion and we can move through this current period of volatility. Do have a good weekend.