Higher for longer validated

Markets were in doubt about rate cut being priced out and pushed back to later in the year. But they are now forced to accept the narrative of higher rates for longer as inflation is sticky and the economy resilient - economic data released is validating this narrative since previous week.

In this article:

1.       Room to breathe?

2.       What does this mean to consumers?

3.       What is our stance?

Key officials of US and UK Central Banks now have room to breathe as data validates their decision in maintaining rates at current levels as risk to higher inflation is not yet tamed. For the UK, the Unemployment figures was a surprise as it decreased from 3.9% to 3.8%, when the expectations was for a tick up of 0.1% to 4%. Average Earnings for both, including and excluding Bonus, have increased to 5.8% and 6.2% respectively, beating expectation of 5.6% and 6% respectively.

For inflation, the overall inflation data in UK came weaker than expected – much of the market thought that since unemployment decreased, that would have translated into higher inflation, which obviously did not come to pass. The only inflation figure to tick up was the Producer Prices Index Core Output YoY, which increased 0.2% in January when the expectation was for a decrease of 0.3%.

For the US, the much-expected inflation figures came out extremely good for the Dollar but not for the S&P500 as the data released knocked all expectation figures and aided in bringing the index down from all-time highs. So, this means that by the US having released positive employment and strong inflation figures, we can to some degree, expect following data released to be on the strong side as well.

What does this mean to consumers?

We can see pressures in the economy to slow it down, and the average consumer is the first one to experience that. Now that rates are expected to stay high for longer, consumers will have to tighten their belts and prepare to spend less for longer as cost of money is expected to stay longer at current rates. But the UK is in a tight spot as the economy is in a high inflation and low growth environment. Now that employment figures provided BoE Governor Andrew Bailey more “ammunition” to back-up his stance as a holder of current levels in policy rates, it means that UK has a higher probability of a hard-landing scenario.

Tomorrow, the quarterly GDP data for UK shall be released and the expectation is for another contraction of 0.1% in Q4 of 2023, which would imply a technical recession.

For the rest of the week, we have retail sales for UK and Building Permits, PPI MoM and Michigan Consumer Sentiment for US.

Markets reacted negatively for UK CPI data: the Pound is down for the day across the board, the FSTE100 ticked up a little but stopped at 7591.2 GBP and UK Gilts are also sliding downwards for the day. Inflation figures released today may mark the start of a downward trend in the Pound as UK investors do not believe that the UK has an economy that can handle such high policy rate. Although the risk to higher inflation persists, such as the lower unemployment rate printed yesterday, the BoE must reassess the economy as it runs the risk of damaging their credibility as warned by investors.

What is our stance?

RC is on the side that expects a UK recession until data proves otherwise. We see the Great British Pound depreciating against AUD, NZD and JPY due to weakness in the UK economy, a rebound from China´s economy situation, the cutting of rates soon to occur by BoE and BoJ coming out of negative policy rates territory.

Email: info@reigncapital.co.uk

UK Phone: +44 7765 063020 | PT Phone: +351 9390 79132

United Kingdom Address: 37th Floor, 1 Canada Square, Canary Wharf, London, E14 5AA.                                                 

Portugal Address: Avenida da República 50, 2nd floor, Lisbon, 1050-196, Portugal.

For more information please visit: https://www.reigncapital.co.uk/insights

Disclaimer:

This publication has been prepared by the Investment & Proprietary Trading Department of Reign Capital Limited. (“RC”) solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but RC does not represent that it is accurate or complete. RC does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice. The distribution of this publication may be restricted by law or regulation in different geographical jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions. Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent in writing of RC. Reign Capital Limited is an Institute of Trading and Quant Global Macro Management firm registered in England and Wales under registered number 12937913. Reign Capital Limited authorised and regulated by FCA Hosting Licence in strategic partnership with Pelican Asset Manager / London & Eastern LLP (authorised and regulated by the FCA, FRN: Number 534484), and brokerage alliance with AXI / AxiCorp Limited (authorised and regulated broker in the UK by the FCA). Our registered address is at Office 3.05, 1 King Street, London, EC2V 8AU, United Kingdom. Investors' capital is always at risk.

RC_Insights_Article12_Higher_for_longer_validated.pdf

Download PDF • 219KB