More, more? Not so sure.

A good week for

• Oil advanced a further +2.8% in US dollar terms
• Sterling weakness boosted the performance of US and Japanese equities in sterling terms
  
  

A bad week for

• Bonds continued to broadly weaken
• UK, European and emerging market equities fell over -2% in sterling terms
  
  

Bank of England

The Bank of England’s Monetary Policy Committee last week voted to raise the policy interest rate by 0.25%, to 1%. Bank staff will also design a strategy for accelerating the Quantitative Tightening (QT) programme as the Bank looks to begin active bond sales - the plans are to be considered at the August meeting. The accompanying report indicated greater economic uncertainty, given the upbeat assessment from firms but far weaker consumer confidence in the face of negative real income growth. While three committee members voted in favour of a larger 0.5% hike to rates, the minutes indicate that at least two members do not consider further tightening to be necessary. As before, Bank forecasts suggest that futures markets, which still anticipate rates being above 2% by the end of the year, are pricing in more tightening than the economy could sustain. Economic forecasts based on the rate path indicated by futures markets foresee negative growth in 2023, in part due to a second surge in inflation expected at the end of 2022. Bank forecasts see inflation rising to 9% in April, and then above 10% in October, on the assumption that the autumn Ofgem price cap rises by 40%.

Federal Reserve

The US Federal Reserve (Fed) also tightened monetary policy last week, raising interest rates by 0.5% to 1%. Despite the double-sized hike, markets received the news as dovish, perhaps reflecting comments that a 0.75% increase was not being considered. The announcement also included details of the Fed’s QT programme. From 1 June, balance sheet asset reinvestments will be capped monthly, with maturing payments only reinvested beyond $30bn in treasuries and $17.5bn in mortgage-backed securities. This cap will then double within three months. The Fed also indicated that the balance sheet would be run down to a level “consistent with ample reserves.” High inflation is likely to weigh on activity in the coming months but the Fed signalled that a marked deceleration is needed to end tightening.

China

Last week’s business surveys saw Chinese businesses report conditions weakening further, as the economy continues to suffer from the impact of restrictive health policies. The Caixin Purchasing Managers’ Index reading for the Services sector in April fell to 36.2, well below the “50” mark which signals a contraction. Beijing officials made a number of announcements last week designed to bolster confidence in China’s economy, including comments endorsing the easing of monetary policy and financial conditions, and relaxing regulations on the tech and real estate sectors. However, it is becoming increasingly clear that China’s economy will continue to suffer unless the zero-Covid policy is relaxed. Given that this is not expected until the autumn, to allow time to rollout vaccines more broadly, growth looks likely to disappoint Beijing’s 5.5% growth target.

Eurozone energy

European leaders continue to progress plans to move away from Russian energy sources, with further war crimes strengthening the collective resolve to cut consumption as fast as possible, despite the economic impact. Given that much of the gas Europe receives from Russia is in gas pipelines, the global supply of energy will shrink, putting further upward pressure on prices. The EU has also decided to end imports of Russian coal by mid-August, and is looking to stop importing Russian crude oil within six months, and oil products within eight months. However, exceptions will be applied to some countries until the end of 2024. Given that an immediate gas embargo would be likely to tip the Eurozone into recession, this may not take place until concrete steps to increase liquefied natural gas imports have been put in place.

Green energy

High energy prices have further stoked interest in renewable energies, including wind. However, building the infrastructure to harness wind is resource intensive and higher demand is pushing up prices. Wind energy company Vestas experienced write-downs related to exiting Russia, but also due to higher prices and supply chain disruptions. Given that renewable energies are more capital intensive for the same amount of power than fossil fuels, demand for these resources is likely to remain elevated.

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