Market Update

In the UK, on Thursday, August 4, 2022, Bank of England (BoE) policymakers voted 8-1 to raise interest rates by 0.5% to 1.75%. While this rate hike was widely anticipated, the surprising element lay in the revised growth and inflation projections presented by the BoE.
The BoE's new inflation forecast suggests that price increases will reach their zenith later this year, peaking at 13.3%. However, what raised eyebrows was their belief that inflation will remain elevated, staying above current levels, throughout the next year. They anticipate that inflation won't return to their 2% target until 2025.
Equally disheartening were the BoE's revised growth forecasts. They now foresee a 2% contraction in the economy. Notably, the UK economy is not only expected to enter a recession this year but is not projected to recover until 2024.
It is important to approach these forecasts with skepticism and caution. They may not hold true, especially in light of the impending change in government leadership, with a new Prime Minister on the horizon. The forecasts could be influenced significantly by the potential fiscal stimulus promised by the current favorite for the position, Liz Truss. Thus, a prolonged recession is far from guaranteed.
Regarding inflation, while gas prices have continued to rise, hinting at further energy bill increases in October, various indicators suggest that inflationary pressures may be subsiding. Petrol prices at forecourts have decreased as the price of a barrel of oil dropped over 20% from its peak in June. Furthermore, several other commodities, including copper and aluminum, are currently trading well below recent highs.
Additionally, shipping costs have experienced substantial declines. For instance, the Baltic Dry Index, which tracks prices for transporting cargo such as coal, grain, and iron ore, has halved over the past year. The cost of shipping a 40ft container from China to the US, although still elevated, has fallen by 50% since its peak earlier this year. These signs indicate that global supply chain disruptions, initially caused by the coronavirus lockdowns, are beginning to alleviate.
Moreover, today's robust US employment data, which saw the economy add 528,000 jobs, more than twice what economists had expected, provides no indication of an impending downturn. As the saying goes, "When America sneezes, the world catches a cold." Currently, there are no visible signs of a downturn in the US economy.