Market Update

PMI readings for April from the US, UK, and Eurozone, released today (Friday 21 April 2023), outperformed March's data and surpassed economist predictions, registering at 53.5, 53.9, and 54.4, respectively. With 50 marking the threshold between expansion and contraction, these numbers hint at not just an economic revival, but a quickening pace of recovery in these regions.
Such positive data may embolden central bank policymakers to persist with their assertive interest rate hikes.
Interestingly, Silvana Tenreyro, a BoE policymaker, used the "fool in the shower" analogy, which we've frequently referenced. Originally coined by Milton Friedman, this metaphor illustrates the scenario of someone scalded by hot water in a shower after cranking up the heat in response to initial cold water. Drawing a parallel, it appears that central banks in the US, UK, and Eurozone may have acted too hastily in ramping up interest rates without fully assessing the delayed ramifications of prior hikes, much like the delayed reaction of hot water in a shower.
While prevailing inflation data, like the UK's recent CPI figure of 10.1%, might suggest a need for further rate hikes, we contend that inflation isn't as grave a concern as it's being portrayed. We've consistently argued that the current inflation surge isn't a product of skyrocketing demand and that, due to base effects, we can expect a marked deflation by year-end, possibly even aligning with BoE's 2% target.
The recent hike in energy prices has undeniably strained our wallets. Additionally, the looming expiration of numerous two-year fixed-rate mortgages — a result of a rush to benefit from a stamp duty holiday two years prior — will further reduce disposable income for many, given that current mortgage rates dwarf those from two years back.
Given consumers fuel approximately 60% of the UK's economy, reduced spending could swiftly plunge the UK into a recession, underscoring the need for policymakers to pause and allow prior rate hikes to manifest their effects.
But this isn't solely a UK-centric issue. Rising car loan defaults in the US, increased credit card dependencies for daily expenditures (with consumers making up two-thirds of the US economy), and insights from the Fed's Beige Book report released on Wednesday (19 April 2023) all hint at potential roadblocks in the US's economic trajectory, especially given the recent banking challenges possibly impeding loan access for households and businesses.