Weekly View - Interest rate blues

Central banks delivered a combined 600bps of tightening last week, bringing the total number of rate hikes this year around the world to over 150, as they belatedly attempt to tackle inflation. The UK’s ‘mini budget’ featured the largest tax cuts since 1972. Taken in combination with an energy aid package that could cost GBP150 bn, markets reacted by selling both gilts and sterling – a rare occurrence in developed markets that demonstrates the limits of aggressive fiscal policies in today’s environment. The fiscal loosening means the Bank of England will have to be even more hawkish than before to keep control of inflation as it tries to adapt to a government intent on stimulating growth come what may. We are negative on both UK gilts and sterling. 

The rapid depreciation of the yen forced the Japanese ministry of finance to intervene in currency markets for the first time since 1998, while the Fed and the Swiss National Bank (SNB) announced 75bps hikes. The widely expected Fed hike was accompanied by more hawkish rhetoric and a dot plot pointing to ever-higher rates as the US central bank tries to push the entire yield curve above the inflation rate. Rumours about a 100 bps SNB rate hike proved unfounded– although the SNB did not rule out another hike before its December meeting. Bond yields rose during the week, the 10-year US Treasury yield going briefly above 3.8%. Shorter-term yields rose even more and are becoming quite attractive. We are positive on the 1-3 year space. US and global equity indexes slipped into bear market territory again while the tech IPO market is suffering its longest drought in 20 years. With Ford issuing an earnings warning, citing higher costs and margin pressure, we are negative equities.

Putin’s decision to organise ‘referendums’ in occupied territory, to mobilise additional troops and to threaten the use of tactical nuclear weapons is raising the stakes in the Ukraine war. The heightened geopolitical risk weighed on markets and benefitted the US dollar last week. The nationalisation of Uniper, Germany’s largest gas importer, is another negative outcome of the war and we expect more pain for corporates. Giorgia Meloni is set to become Italy’s first female prime minister in a new conservative nationalist government. So far, markets have been unfazed by the election result, which was widely expected. A key focus will be the composition of the new government, including the finance ministry, and any attempt to renegotiate the criteria for disbursements of the EU’s recovery fund. Overall, as Italy’s economic difficulties mount, the country’s fiscal discipline will be tested. We are negative euro periphery bonds.