Market Update 31st October 2022

Higher and higher

It feels as if Rishi has been in situ almost forever. After nearly a whole week of calm, it is possibly perverse to think that this time last week Liz Truss was still PM. The world moves on quickly; the pound is now worth all of $1.15, gilt yields have sunk back to September’s levels and England has lost another cricket match to Ireland. It is good to be back into familiar territory.

This is going to be a good week for those who are considered to be ‘savers’. Even if we ignore the offers restricted to those with less than £2 in their account, banks are starting to pay interest on cash deposits again. A quick glance at tinterweb this morning shows that 2% or so is readily available on instant access, and 4.5% for a one-year fixed rate. If you are as old a fogey as me, then you would also need to ignore that you will not have heard of any of the undoubtedly venerable institutions that appear to be scrambling for our cash.

These rates should, if all goes according to form, rise further on Thursday. The Bank of England is putting us all on the naughty step for paying so much for energy and is set to raise bank rate (as the Bank calls it these days) by 0.75% to 3%. The day before, the Federal Reserve is expected to make the same increase to US interest rates, which will then rise to 4%.

The equity and bond markets have started to become excited by the prospect of these Central Banks being close to deciding that they have raised rates sufficiently. In fairness, it is quite hard to tell. Assuming that the Fed does raise rates by another 75bps on Wednesday, this will be the fourth consecutive time of having done so. To save you from reaching for the calculator, that makes an increase of 3% since May (they had a month off in August). That is barely enough time to plan a holiday, let alone work out if your monetary policy is working. Patience, though, appears to be an old-fashioned commodity these days.

We should also remember that the Banks have two arrows in their anti-inflationary quivers. The rate of interest being one, and quantitative tightening (or ‘QT’) being the other. QT is a huge economic experiment. Its better-known sibling, QE, has been a tremendous success, even if some (including me), might argue that the inflationary creek in which we find ourselves was largely carved by its excessive use. QT, or even the mere threat of it, was one of the causes of the panic in the gilt markets that hastened the demise of the previous prime minister. The European Central Bank, which also raised its interest rate by 0.75% last week (group think? Surely not), notably shied away from QT, effectively describing it as its weapon of last resort. The Bank of England and the Federal Reserve appear determined to plough ahead and to sell their holdings of bonds back to the markets. It is these plans, at least as much as interest rates, that will grab the attention on Wednesday and Thursday. There is arguably nothing that frightens a Central Bank more than disorderly bond markets, and nothing that scares the bond markets like QT.

Last week we also saw the first estimate of how the American economy fared in the third quarter of the year. By all accounts, it was rather good and the quarter-on-quarter growth rate of 2.6% was somewhat higher than expected. We have to remember, though, that we are entering a looking-glass world. A healthy and growing economy is not going to encourage the Federal Reserve to think that it is time to stop raising interest rates. Au contraire. In a world of instantaneousism and zero patience, this is more likely to be a red flag to a bull, a sign that higher interest rates are not yet working. More cod liver oil is likely to be in the offing.

It was also the week in which many of the large US technology companies revealed their fortunes in the past quarter, and their spin on how the world is currently shaping up. And quite a mixed bag it was too. We saw a combination of slowing demand, problems with a high dollar, and ongoing production challenges. None of these was disastrous (so long as we ignore the Company-Previously-Known-As-Facebook) and, combined, they point to weaker business conditions than were flagged by the GDP report. Remembering that we are on the wrong side of the looking-glass, perversely this is potentially good news.

We should end this week with a quick reflection on Shell’s admission that it made profits of $9.5 billion in the third quarter. Without in any way wishing to express views on rights and wrongs of fiscal and energy policies, this is a number that will have been noticed Chez Jeremy Hunt. A Happy Halloween to one and all.

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

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