Sell everything?
Let’s hope not. But a return to the ‘sell everything’ mentality was unmistakably present in markets last week. Traders were blindsided by US jobs data on Thursday, with data recording in at nearly double the consensus estimate. Bond prices across virtually all of the Western hemisphere fell alongside stock indices. Despite being more than one year since the last fire sale that pre-emptied a rush to raise interest rates, alarmingly similar dynamics were tangible last week. Regulators and monetary authorities will be wary of repeating the mistakes made in 2022 that allowed such a disorderly adjustment to higher rate expectations.
With respect to UK rates and the GB Pound, the sell off was initially catalysed by the Bank of England’s latest publication. A survey of businesses revealed alarmingly similar inflation expectations amongst business versus those published two months ago. The Bank of England would have been very much hoping for a moderation in inflation expectations amongst businesses, validating the rate hiking cycle it has embarked upon. Even more disappointingly, wage inflation expectations were seen on aggregate to rise since the last publication, forcing bond prices lower. UK interest rate expectations continued to climb with the peak in rates priced in above 6.5% with pricing indicating that the BoE will not finish its hiking cycle until early next year. It still seems likely that this pricing is not sustained or realised, however, the BoE publication has been sufficient to allow the return to rate-hike fever.
GBP was initially unable to maximise gains that might have been expected from rising rates expectations. This was due to the business survey also giving justification for further domestic growth concerns. Markets remained focus on jobs data on Friday. Friday’s non-farm payroll numbers will continue to play a part in investors’ decision making but estimates for the August publication will already be very much in focus.
Discussion and Analysis by Charles Porter
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