We will muddle through amid economic woes
IT’S amazing how far we’ve come in a short period of time. Back in early February, financial markets were still pricing in the chances of a Bank of England rates rise in May.
Now, with the release of minutes from June’s MPC meeting, a rate hike isn’t fully expected until July 2012. As a result, short dated gilt yields have continued to fall and the pound has touched three-month lows against the dollar, a currency whose own index has been at a 15-year trough.
I’ve written before about good reasons for not expecting a hike until well into next year but from a trading perspective it could now all be in the price. The trick for the next couple of months might be to look for a re-evaluation of current projections. Is the current rate profile of a hike in the 2012 third quarter overly pessimistic?
Key as ever will be not what happens to inflation, but to growth. This week’s June manufacturing will tell us more. Investec says the UK measure won’t fall back as heavily as the Eurozone PMI, “since we expect UK producers should recover somewhat from the added disruption of the early-May extended Bank holiday period”. All fine but over coming months there’s still unlikely to be any relief from the pressure on households’ real disposable income, as wages fail to meet higher costs of living.
So it’s the international picture that’s key. You have to decide whether the recent slowdown in global economic activity is just a temporary “soft patch” or something worse.
I’ve been struck by the number of CNBC commentators who believe in the former. Goldman’s Jim O’Neil was just one who says he’d vastly underestimated the impact from Japan supply outages. That’s one leg of the temporary argument. The second is the impact of higher energy prices which were dissipating even before the IEA action. The third is that the slowdown in Asia has been manufactured by policymakers who are likely to stop tightening measures over the summer, particularly in China.
Set against these factors is the impact of what’s been dubbed the balance sheet recession in the US and other parts of the West. That’s the long work-through of debt problems which have been transferred onto sovereign books. The problem for financial markets is that they oscillate between the two contrasting scenarios. It’s either risk on or risk off.
Right now, we’re very focused on the latter, particularly with Greek debt, but the true path may be one of muddling through with weaker than historic growth rates but enough to sustain corporate profitability.
Ross Westgate is co-anchor of CNBC’s Worldwide Exchange.