Market Update 20th September 2022

Hanging tough

We return to normality with a little bump this morning. Markets move on regardless. The utter brilliance of the Funeral will soon fade and we have to return to the marching tedium of inflation and interest rates. It was with no degree of insight that we ended last week’s column with the observation that last week’s update to the US inflation rate was a potential banana skin. The market duly planted its foot plumb on said skin, slipped and landed painfully on its coccyx.

This tells us much more about the market than it does about inflation. It should be a statement of the obvious that guessing the monthly variations of such complex calculations is a game for mugs and statisticians. No matter. The reality was that the States’ annual headline inflation rate fell from 8.5% to 8.3%. The trouble was that naïve and optimistic markets were anticipating a larger drop, to 8.1%.

We should slip in a quick tangent about the differences between the ‘headline’ and the ‘core’ rates of inflation. Much is made of the importance of the latter, which exclude the direct costs of food and energy for reasons now lost in the mists of economic history. One way of looking at the difference would be to say that core inflation ignores most of the things that actually matter (it would be a full house if water was also excluded). Or ‘inflation ignoring inflation’. It is also a challenge why the core rate should exclude energy (ie oil, petrol diesel and so on), but include all the goods and services whose prices are directly affected by these. Core inflation rates are herrings of a scarlet hue.

Interest rates are going to rise in both the US and UK this week, most likely by what technicians may call ‘a lot’. Let us temporarily reflect on what others might call the staggering incompetence of the US Federal Reserve. America’s Central Bank, and the leader of western financial policy, did not end its bond buying, or quantitative easing, until March this year. If we are generous and say that the Fed at that time did not yet know the level of inflation in February and was still working on January’s data, then the US headline rate was 7.5%. It is worth reiterating: US inflation was 7.5% and the Fed was still using emergency levels of stimulus. And yet they, and the Bank of England in particular, are publicly adamant that inflation is the fault of Putin and the Chinese. It beggars credulity.

It particularly beggars one’s credulity that the Banks are now inflicting huge and painful rises in interest costs to counteract inflation that they argue was not caused by interest costs in the first place. The irony of this is utterly lost on Central Bankers who, to all outside appearances, appear to believe that to save personal face they have to be seen to be tough and force economies into recession. Monetary policy, it appears, is being set according to the 1989 mantra of the then hard man of the UK’s Exchequer, John Major: ‘if it isn’t hurting, it isn’t working’.

We saw two notable profit-warnings last week. First, Hilton Food Group underlined the potential current jeopardy of being a price-taker with already thin margins. Second, the newly installed chief executive of Federal Express aired his view that they are already facing a global recession as he warned of sharp shortfall in quarterly earnings. Whatever one’s views of the potential specific short-comings of FedEx, this is not good reading.

The question is how far these tensions can be stretched before something twangs. At some stage – maybe this year, maybe next – the markets will take the view that the Central Banks have got things terribly wrong and will have to start cutting rates. Experience says that this will be some time before the Banks themselves have twigged. In the meantime, if Thursday is the day that Mr Bailey will preach his self-defensive nonsense about our having to swallow his monetary cod liver oil, then Friday is when Team Truss-Kwarteng tells us about their tax cuts.

And that brings us right back to the start. Internationally, there is so much to admire about the United Kingdom, so much that is unique to our medium-sized islands. If we can bring these back to the fore, together with a fiscal policy that is genuinely attractive to international capital, then we might (just might) have a hugely important corner in front of us.

Jim Wood-Smith – Market Commentator and Head of Climate Transition

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