No further stimulus, unless there is a no deal Brexit

No further stimulus, unless there is a no deal Brexit

The next Monetary Policy Committee (MPC) meeting on Thursday 17th December should be less eventful than the last one. Indeed, if our more optimistic economic forecasts are even close to being right, then the MPC may find itself twiddling its thumbs for the next few years! But the risk of a no deal Brexit means the MPC can’t relax just yet.
Thomas Pugh UK Economist
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UK Markets Chart Book

Investors spooked by Omicron risks

The discovery of the Omicron COVID-19 variant in late November rattled UK markets. Equities tumbled, sterling weakened and corporate credit spreads jumped. And, while the initial reaction was not unique to the UK, it does seem that investors remain a bit more downbeat on the UK’s prospects relative to elsewhere. Compared to the US and euro-zone, credit spreads remain higher, sterling is still weaker, government bond yields have fallen further and the downward shift in investors’ interest rate expectations has been striking. Admittedly, equities have more-or-less recovered in line with other major benchmarks, but that seems mainly due to global factors pushing up the internationally-focused FTSE 100. For our part, we agree with investors that the UK’s near-term outlook looks fairly gloomy. In fact, we expect GDP to contract by 0.1% m/m in December, and the risks to even that subdued forecast are on the downside. But where we differ from investors is in our view of the likely pace of interest rate hikes by the Bank of England. We expect Bank Rate to reach 0.50% by end-2022, well below the 1.00% currently discounted in markets. Note: Central Bank Drop-In – The Fed, ECB and BoE are just some of the key central bank decisions expected in this packed week of meetings. Neil Shearing and a special panel of our chief economists will sift through the outcomes on Thursday, 16th December at 11:00 ET/16:00 GMT and discuss the monetary policy outlook for 2022.

15 December 2021

UK Markets Outlook

Markets mistaken on speed of rate hikes

Although the economic backdrop has recently become less favourable for UK asset prices, we expect that the economic recovery will regain some vigour in the second half of next year, that CPI inflation will fall close to the 2.0% target in late 2022 and that over the next two years the Bank of England won’t raise interest rates as fast or as far as investors expect. As a result, we expect 10-year gilt yields to rise from close to 0.90% now to only 1.50% by the end of 2023 and we think the FTSE 100 will climb from around 7,225 now to 8,000 by the end of 2023. Relative to our US forecasts, the rise in bond yields is smaller and the increase in equity prices is larger. That said, we are not expecting the pound to strengthen against either the dollar or the euro. In fact, the risk is that it weakens against both.

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UK Markets Chart Book

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The extent of the shift in investors’ expectations of interest rates over the past month has been staggering. Investors are now pricing in an 80% chance of a hike to Bank Rate, from 0.10% to 0.25%, at the Monetary Policy Committee (MPC) meeting on 4th And a further rise to 0.50% is now fully discounted in markets by the meeting on 3rd February. We agree with investors that an interest rate hike in the next few months looks increasingly likely. But, in our view, the extent of tightening that investors have priced in looks wide of the mark. Instead, we expect the Bank of England to hike rates gradually and by less than most expect. That’s based on our forecast that economic activity will be soft over the next few months, and that CPI inflation will peak just shy of 5% in April 2022 and fall back sharply thereafter.

22 October 2021

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UK Data Response

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UK Data Response

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Another strong set of labour market figures released this morning will feed concerns about labour shortages and the possible impact on inflation of higher wage growth. But the level of employment is still well below its pre-crisis level and underlying wage growth is much weaker than the headline number, suggesting there is still plenty of slack in the labour market.

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