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London Quick Take - 16 Sep - Fed to hike, UK inflation rises, no Clarity for crypto
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Meanwhile, crypto stocks were down as the Clarity Act failed to clear its Senate vote, Coinbase –10%, Circle Internet –12% for instance as Bitcoin fell -2% to $75k mark. It's looking like the attempt to establish permanent crypto rules won't get off the ground for a while yet unless some serious legislative acrobatics can be performed as time runs out on the legislative session. It adds regulatory uncertainty as a headwind to the sector. The considerations seem a lot more political than technical – a lot of the opposition seems to come from Democrats who think it will line the pockets of the President. But banks are also offside due to the crypto industry wanting to gain interest on stablecoins – risks to small banks due to risk of deposit flight being cited but largely this is about banks not wanting competition for deposits. Banks are worried about a genuine competitor that will pay more than they can do with regular savings accounts.
Tl/DR: Bond yields backed off with Fed almost fully expected to hike, BoE likely to wait, European stock markets rally off 3-month lows, Brent failing to make fresh highs but remains above $107.
Oil and bond yields eased ahead of the Fed decision later this evening. European stocks rallied off roughly 3-month lows rising around half a percent to reclaim 10,700 as some of the moves that's hit the indices reverse a little. Miners rose as copper rebounded off its lowest in seven weeks, while precious metals were supported by a slight pullback in yields and the dollar back down from a 2-week high with gold +1% and silver +2%. Barratt Redrow rallied +6% and delivered a positive read across for housebuilders as its completions rose 5% to the top end of guidance. There could be more good news in store for housebuilders if the government revives Help to Buy. UK defence names Babcock, BAE Systems, Qinetiq are extending their rally from Tuesday after a Russian warship fired flares at a Danish helicopter...first such incident and suggests Russia more prepared to take risks and potentially more unpredictable...Poland warns Russia is "stepping up aggression towards Nato". Could also point to the advance of the Houthis and possible UK involvement to help Saudis.
Oil prices were steady with Brent in the $107/08 range, with September gain now almost 20%. Talks on a temporary Hormuz shipping corridor were reportedly postponed. Prices eased this morning with Brent -1% on the API reporting a weekly rise in US crude and fuel stockpiles, while data showed flows through the Strait of Hormuz rising to their highest since June/July. However, this will only partly offset lost export barrels following drone attacks that shut Saudi Arabia’s East-West pipeline, for which there is still no restart timeline.
UK inflation is higher but doesn't call for an immediate response by the Bank of England. CPI rose to 3.1% from 2.9%, driven largely by fuel costs. Services inflation and core inflation, usually better gauges of underlying inflation, were unchanged at 3.4% and 2.6% respectively. The trick is the longer higher energy prices stay around the greater the risk inflation becomes embedded; we're already into the BoE's 'adverse scenario' that might call for 4 hikes. It's whether energy prices feed through to second order effects that the BoE is waiting for - I assume no hike tomorrow, but markets expect one by November. Certainly, the inflation print is not screaming for a rate hike right now but expect another 6-3 split to hold rates where they are. Gilt yields ticked lower, with the 10yr backing down around 5bps to 5.35%.
If the BoE is looking ahead to guess whether there are second order effects from the energy shock, the downside risks to the economy would outweigh upside risks to inflation outlook. For me the danger isn't so much prolonged inflation but rather an economic slowdown/shock caused by the Middle East situation, particularly as we see diesel prices spiking. US diesel futures settled at a record $5.26/gal, topping April 2022’s $5.13. Unlike the US, where the inflation story is as much about growth and a tight labour market as it is about headline oil prices, the UK is suffering a declining labour market and has is constrained fiscally to do much to help by borrowing. Hiking rates is not going to help. The Bank of England's own Decision Maker Panel survey indicates cooling on the inflation front and limited pass-through from energy. Governor Andrew Bailey noted recently that the UK had seen “quite subdued second-round effects” alongside a softening labour market. Today's CPI report answers another of the big questions facing the BoE ahead of tomorrow's rate decision.
The other question raised by the inflation data - on top of yesterday's soft labour market report - is to what extent the govt feels compelled to offset the steady increase in the cost of living and the fiscal implications that derive from such decisions? Inflation could worse before it gets better, with reports yesterday saying household energy bills will jump 25% in January. This is just part of the new normal, the paradigm inflationary regime shift where supply shocks are a feature rather than a bug; and comes as governments are unable/unwilling to reduce spending amid persistently high/rising deficits persistently.
Oil and bond yields eased ahead of the Fed decision later this evening. European stocks rallied off roughly 3-month lows rising around half a percent to reclaim 10,700 as some of the moves that's hit the indices reverse a little. Miners rose as copper rebounded off its lowest in seven weeks, while precious metals were supported by a slight pullback in yields and the dollar back down from a 2-week high with gold +1% and silver +2%. Barratt Redrow rallied +6% and delivered a positive read across for housebuilders as its completions rose 5% to the top end of guidance. There could be more good news in store for housebuilders if the government revives Help to Buy. UK defence names Babcock, BAE Systems, Qinetiq are extending their rally from Tuesday after a Russian warship fired flares at a Danish helicopter...first such incident and suggests Russia more prepared to take risks and potentially more unpredictable...Poland warns Russia is "stepping up aggression towards Nato". Could also point to the advance of the Houthis and possible UK involvement to help Saudis.
Oil prices were steady with Brent in the $107/08 range, with September gain now almost 20%. Talks on a temporary Hormuz shipping corridor were reportedly postponed. Prices eased this morning with Brent -1% on the API reporting a weekly rise in US crude and fuel stockpiles, while data showed flows through the Strait of Hormuz rising to their highest since June/July. However, this will only partly offset lost export barrels following drone attacks that shut Saudi Arabia’s East-West pipeline, for which there is still no restart timeline.
UK inflation is higher but doesn't call for an immediate response by the Bank of England. CPI rose to 3.1% from 2.9%, driven largely by fuel costs. Services inflation and core inflation, usually better gauges of underlying inflation, were unchanged at 3.4% and 2.6% respectively. The trick is the longer higher energy prices stay around the greater the risk inflation becomes embedded; we're already into the BoE's 'adverse scenario' that might call for 4 hikes. It's whether energy prices feed through to second order effects that the BoE is waiting for - I assume no hike tomorrow, but markets expect one by November. Certainly, the inflation print is not screaming for a rate hike right now but expect another 6-3 split to hold rates where they are. Gilt yields ticked lower, with the 10yr backing down around 5bps to 5.35%.
If the BoE is looking ahead to guess whether there are second order effects from the energy shock, the downside risks to the economy would outweigh upside risks to inflation outlook. For me the danger isn't so much prolonged inflation but rather an economic slowdown/shock caused by the Middle East situation, particularly as we see diesel prices spiking. US diesel futures settled at a record $5.26/gal, topping April 2022’s $5.13. Unlike the US, where the inflation story is as much about growth and a tight labour market as it is about headline oil prices, the UK is suffering a declining labour market and has is constrained fiscally to do much to help by borrowing. Hiking rates is not going to help. The Bank of England's own Decision Maker Panel survey indicates cooling on the inflation front and limited pass-through from energy. Governor Andrew Bailey noted recently that the UK had seen “quite subdued second-round effects” alongside a softening labour market. Today's CPI report answers another of the big questions facing the BoE ahead of tomorrow's rate decision.
The other question raised by the inflation data - on top of yesterday's soft labour market report - is to what extent the govt feels compelled to offset the steady increase in the cost of living and the fiscal implications that derive from such decisions? Inflation could worse before it gets better, with reports yesterday saying household energy bills will jump 25% in January. This is just part of the new normal, the paradigm inflationary regime shift where supply shocks are a feature rather than a bug; and comes as governments are unable/unwilling to reduce spending amid persistently high/rising deficits persistently.
I expect the Fed to raise rates today. Market implied odds are around 93%. Combined with the Jackson Hole speech by chairman Kevin Warsh, a rate hike would deliver markets a couple of things they are seeking. One is clarity around the Fed's reaction function, which has been a bit hazy and uncertain. Two, so long as it's clearly labelled and not a 'one-and-done' hike, would signal a credible commitment to lowering inflation, which I think should help anchor the long end of the curve. While we may not be at the end of the bond market selloff, we are certainly close to it. With as much of the move in credit a long-growth story as it is a long-oil story, a move to more restrictive policy should tamp down inflation concerns. As such, a hike could act to remove a clear risk overhang for stocks and bonds. The bar for positive surprises for yields is now a lot higher and I think that a Fed hike could mark an inflection point for long-end rates. Due to the near tick-for-tick correlation between oil and the 10yr yield, the clear risk to this view is a significant repricing in crude due to escalation in the US-Iran and now increasingly Iran-Saudi conflict.
Easing bond yields combined with a more reflective rather than reflexive reaction to the Anthropic AI pacing story may lift Wall Street later with futures pointing higher though paring gains early as the 10yr Treasury yield flipped a tick higher as European trading began. The S&P 500 dipped about half a percent yesterday to close at 7,585, below its 50-day line at 7,611. There was some reversals in the Anthropic reaction trade with Nvidia higher along with Micron and AMD while Google fell. Cybersecurity favourite CrowdStrike kicked on another 3%.
Meta boss Mark Zuckerberg - predictably perhaps - didn't exactly back Anthropic CEO Dario Amodei's calls for slowing down frontier development, saying the focus is on better alignment - ie that AI behaves as directed by humans. Nvidia CEO Jensen Huang also sought distance from Anthropic, saying AI will be “incredibly safe,” and that “we don’t need new laws, we have plenty of laws". Nvidia has a lot riding on massive AI buildout at the frontier to keep up demand and pricing for its chips. Anthropic has a vested interest in slowing down capex to be more profitable for its IPO.
Easing bond yields combined with a more reflective rather than reflexive reaction to the Anthropic AI pacing story may lift Wall Street later with futures pointing higher though paring gains early as the 10yr Treasury yield flipped a tick higher as European trading began. The S&P 500 dipped about half a percent yesterday to close at 7,585, below its 50-day line at 7,611. There was some reversals in the Anthropic reaction trade with Nvidia higher along with Micron and AMD while Google fell. Cybersecurity favourite CrowdStrike kicked on another 3%.
Meta boss Mark Zuckerberg - predictably perhaps - didn't exactly back Anthropic CEO Dario Amodei's calls for slowing down frontier development, saying the focus is on better alignment - ie that AI behaves as directed by humans. Nvidia CEO Jensen Huang also sought distance from Anthropic, saying AI will be “incredibly safe,” and that “we don’t need new laws, we have plenty of laws". Nvidia has a lot riding on massive AI buildout at the frontier to keep up demand and pricing for its chips. Anthropic has a vested interest in slowing down capex to be more profitable for its IPO.
Meanwhile, crypto stocks were down as the Clarity Act failed to clear its Senate vote, Coinbase –10%, Circle Internet –12% for instance as Bitcoin fell -2% to $75k mark. It's looking like the attempt to establish permanent crypto rules won't get off the ground for a while yet unless some serious legislative acrobatics can be performed as time runs out on the legislative session. It adds regulatory uncertainty as a headwind to the sector. The considerations seem a lot more political than technical – a lot of the opposition seems to come from Democrats who think it will line the pockets of the President. But banks are also offside due to the crypto industry wanting to gain interest on stablecoins – risks to small banks due to risk of deposit flight being cited but largely this is about banks not wanting competition for deposits. Banks are worried about a genuine competitor that will pay more than they can do with regular savings accounts.
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