It is often remarked that markets can only focus on one thing at a time. In recent months it has been the question of peak interest rates, but with recent pauses in the UK and US, and the European Central Bank also suggesting that rates are now at sufficiently restrictive levels, attention moves elsewhere.
Primarily, investors are finally realising that perhaps bankers mean it when they say rates will remain higher for longer, with a combination of robust data and higher oil prices leading to inflation levels stubbornly above target levels and base rate cuts likely to come less quickly. The result of this has been bond yields continuing to rise, with the UK benchmark 30-year gilt yield last week reaching its highest level since September 1998. With UK government debt currently standing at about £2.6 trillion, higher borrowing costs will give Chancellor Jeremy Hunt less room for either increased spending, or tax cuts which could ease the cost of living pain faced by many households.
Outside the UK, an expectation that the US will likely remain one of the best performing economies has also been a common theme, helping the dollar rise to a 7-month high vs the pound and making imports such as oil more expensive. Employment data is strong: 336,000 new jobs were added in September, nearly twice the expected figure. This further increases the probability of another rate rise from the Federal Reserve before the end of the year.
Back in the UK, the Bank of England’s deputy governor said that families have spent almost all of the extra cash they saved during lockdown amid ‘clear signs’ of an economic slowdown and weaker discretionary spending. Despite this the pub chain JD Wetherspoon saw sales rise by over 10% to the end of July suggesting that despite a squeezed consumer, perhaps the appetite for cheap food and drink remains intact.