Market Update 12th September 2022
Time’s wingèd chariot
I confess that I love pageantry. Whilst doubtless we all mourn the late Queen in our own ways, the ceremony and the tradition for a change of monarch are astonishing. And while we cannot help but hear time’s wingèd chariot hurrying near, there is an irrefutable comfort in the continuity of the constitutional monarchy. In investment terms, which is this column’s haecceity, the United Kingdom has largely become an international irrelevance. It would be nice to suppose that somehow that might change.
The prime minister is clearly her own lady and, as we were saying last week, has a chancellor with a very impressive background. Between them, they have decapitated the Treasury. By all accounts and hustings, Ms Truss is very keen on tax cuts. Indeed, reducing tax on individuals and companies appears to be the bedrock of her plans to revitalize the UK’s economy. There is a lot in favour of this strategy. Equally, there are those, of whom the erstwhile chancellor Rishi Sunak is at the public forefront, who argue that tax cuts will only add to the roar-away inflation that the dastardly Russians have bestrewn upon us.
Economists are divided on this. Actually that is a meaningless sentence; economists are divided on everything. However, it is important to point out that those who have spent careers analysing data for correlation, causation and coincidence cannot agree whether there is any meaningful link between fiscal policy and inflation. Current convention, as espoused by the Central Banks, is that yes, taxation affects spending, and spending affects inflation. Others cry ‘hogwash’ to the very idea.
Still, let us suppose that Ms Truss may be correct and that she can cut taxes without too great an impact on inflation. Let us also hypothesize that whatever the impact of oil and energy prices has been on inflation, that these will, in due course, neutralise and then reverse. Because they will. And while we are on this track, let us suppose that Sir Tom Scholar, the now not so Permanent Secretary to the Treasury, was also minded to treat tax cuts with a degree of inflationary caution.
I am aware that there is a great deal of supposition in this week’s column. But I am only just getting warmed up. So let us come onto the really very odd decision by the Bank of England to delay this week’s meeting of the Monetary Policy Committee. The playing of cricket, golf, rugger and football are deemed to be appropriately respectful during the period of national mourning, but apparently not so the raising of interest rates. It is, one might say, a rum thing.
One now wonders how Andrew Bailey, the Governor of the Bank of England, may feel about the sacking of Sir Tom. The Bank of England, the Federal Reserve, the European Central Bank, and pretty much every other Central Bank one might name, share a belief in what is inelegantly called ‘New Keynesianism’. Without getting bogged down in academic economics, we can very simply think of this as being the belief that state, and therefore fiscal, policies have a large role in determining inflation. And this would mean that if Mr Bailey’s Bank of England debated their expectations of Ms Truss’ tax cuts, that they may be even more aggressive in raising interest rates. Let us not forget that Mr Bailey, and by default his Bank, strenuously deny that the UK’s current 10% inflation is in any way a result of Bank policy and actions (we should apparently take our pick of any combination from: Covid, Brexit, China and Russia. But definitely not quantitative easing).
What will become of the incumbents of Threadneedle Street? Are they being pressured by Downing Street and the Treasury? If so, will they acquiesce, in the same way as the Federal Reserve did to President Trump? Will Mr Bailey resign? Will he also be sacked? The last question is an easy one, as unless Mr Bailey has been very naughty or is bankrupt, his forced removal would require an amendment to the Bank of England Act 1998. He is in situ until March 2025. I revert to one of my favourite and most used quotes from Oscar Wilde, “The suspense is terrible. I hope it will last.”
The MPC may not be convening this week, but we will still see the latest updates to the inflation rates of the UK and USA. The former matters only a little and is another stepping stone on the path to the Bank’s apocalyptic (and hopefully soon to be revised) forecasts of peak inflation. In the States, however, hopes of what we may call ‘peak inflation’ are in the ascendent. The consensus forecast is that the rate in August will have fallen from 8.5% to 8.1%. Such optimism naturally worries us. Global equity markets performed much better last week; a bad inflation number in the States tomorrow would not go down well.
Jim Wood-Smith – Market Commentator and Head of Climate Transition
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