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Client Update - Friday 13th May 2022

We have got used to central banks giving forward guidance, but not very often do we get comments in the rear-view mirror. It was therefore interesting to read Jerome Powell, Chair of the FED, this week explaining that perhaps they could have started to raise rates earlier than March, but that they did not as they were reacting to the data they had at the time. In the UK, senior Conservative MPs have turned on the Bank of England (BOE) over its handling of inflation, in a rare outbreak of political criticism of the central bank. Boris Johnson’s party is feeling the political heat as the cost-of-living crisis intensifies and now some Tory MPs are blaming the BoE, which has been operationally independent for 25 years, for losing its grip on prices. Liam Fox, a former cabinet minister, told the Commons that the BoE had “consistently underestimated the threat” of rising inflation, which the BoE fears could top 10 per cent later this year. “The BoE persisted beyond any rational interpretation of the data to tell us that inflation was transient, then that it would peak at 5 per cent,” he said. Fox said the Commons Treasury select committee should launch an investigation into the central bank’s handling of inflation.

These comments come as global equity markets are continuing to attempt to digest a difficult meal of falling growth, stubbornly high inflation and the mixed messages from developed market central banks. Added to a continued squeeze on the cost of living, indigestion appears to be rife. US inflation data this week showed some good news with a fall in the monthly CPI figure (down from 1.2% in March to 0.3% in April) the first fall in eight months. Annual inflation remained stubbornly high though and at 8.3% for April, was only marginally below the 8.5% figure for March. The CPI’s food index hit a 30 year high with a 9.4% year on year increase. We expected to see inflation dip slightly in April and although oil prices remain high, they have traded sideways since the middle of March and natural gas prices were edging lower before Gazprom announced this week that it would no longer be able to move liquid gas through the major Yamal pipeline into Europe.

It was not so much a bearish US Federal Reserve (FED) that provided angst to the markets over the last week. This time the main concern was raised by the BOE. Fresh from their fourth consecutive rate rise, their comments that inflation would be hard to control and that they saw slowing global growth was set against three members of the committee calling for a higher 0.5% rate rise. This underlined some of the differences between the Monetary Policy Committee (MPC) in the UK and the FED in the US. In the Federal Open Market Committee (FOMC), the chairman solicits views ahead of the policy meeting and diplomatically seeks a consensus that is likely to be close to what has already been messaged to markets. In the UK, the MPC has more of a heated debate. No wonder there is more of a history of dissension. The growth/inflation mix is likely to be worse in the UK over the next year or so. The Bloomberg consensus is for UK growth of 3.8% this year and 1.6% in 2023, with inflation expected to average 7.1% in 2022 and 3.4% in 2023. This is a more “stagflationary” (low growth and high inflation) outlook than the 2.1% growth and 2.8% inflation forecasts for the US in 2023. There is also scope for more uncertainty on the political side which all adds up to not being very bullish on sterling for the time being.

The current weakness in markets will undoubtedly resolve itself when energy prices pull back and inflation starts to consistently fall and perhaps this will come in time for the FED and BOE to step back from some of their final planned rate rises in 2022. Our investment team are using current market conditions to buy into positions that were previously seen as too expensive and the portfolios we manage look in good shape to navigate the current volatility and participate in the recovery when it comes. I hope that you have a good weekend, do let us know if you have any questions.

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