On a dull and dreary Friday morning here in the West Country (we should have expected it for the Glastonbury music festival after all), thoughts drift to summer getaways to the sun. The only problem appears to be there are no trains to get you to the airport, and now there may be no staff to check you in at Heathrow. Around 700 British Airways check-in staff have agreed to strike over pay and their unions are negotiating with the promise to cause “severe disruption” just when the summer rush starts in the latter part of July. BA had already cut 10% of its flights over the summer due to staff shortages.
If venturing overseas looks tricky, casting our eyes back home we awoke this morning to news that the Conservative party have been dealt a fresh blow, losing two by-elections – to the Liberal Democrats in Tiverton / Honiton and to Labour in West Yorkshire. Given the difficulties Boris Johnson has faced over recent months, these results cannot be deemed a surprise, although the results have led to Conservative Chair Oliver Dowden standing down from his role – stating the Tories “could not carry on with business as usual”. “Somebody must take responsibility and I have concluded that, in these circumstances, it would not be right for me to remain in office”.
The travel and political unrest has been replicated once more in the investment markets this week. As mentioned previously, market commentary has been moving from high inflation pushing interest rates higher, to high inflation and high interest rates resulting in slower growth, leading to a recessionary environment. Bonds have rallied this week as traders are starting to bet on the US Federal Reserve (FED) not being able to be as aggressive with future rate rises as recently announced, should they be pushing the US economy into a recession. Growth concerns have been around for a while, but now they suddenly appear to have moved into sharp focus. Food and oil prices are largely impacted by events in the Ukraine and bottlenecks in global supply chains as a result of Chinese COVID lockdowns and whilst improving, will take some time to be fully resolved. These events themselves cannot be managed by central banks hiking interest rates, however demand does need to be managed in light of weak supply and raising rates to increase the cost of debt is a sensible step. US and UK job markets are also running hot, with wages rises boosting inflationary pressures. Currently in the US, there are twice as many new job opportunities as there are unemployed people and, in the UK, unfilled job vacancies are the highest in UK history (source Macrobond). Central bank policy may well start to reduce employment and cool wage price pressure, but it will take some time.
Raising interest rates into a slowing growth environment is not a normal course of action, but then we do not live in normal times. The current rate cycle may well lead to a mild recession and this is likely to be needed to deal with the current inflationary environment. One could argue that much of this is already priced into markets as we stand here today, so any semblance of good news should lead to a rapid recovery in some of the growth assets that have struggled in the last six months. As always, we remain vigilant on your behalf. Do have a good weekend.