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London Quick Take - 17 Sep - Equities bid after Fed hikes, long-end yields back off, BoE to hold
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
Equities are catching some bid after the Fed hiked rates while bond yields are backing off along with oil prices. Brent crude has dipped to a one-week low below $104, breaking out of its recent range. Gold rallied as yields dipped even as the dollar rallied back to where it was before the Fed's July meet. The Bank of England is expected to stand pat on rates today.
There are three things certain in life; death, taxes and Next raising its profit outlook while still sounding gloomy. The retail 'bellwether' raised profit guidance for this financial year by £12mn to £1.255bn on slightly improved sales expectations and additional cost savings. However, it has cut its forecast UK sales growth to +2.0% from +2.8%, expecting a steady decline rather than a sharp fall, citing rising inflation, higher mortgage interest costs and a weak employment market. In a pointed dig at the Chancellor before the Budget, Next warned that "these worries will only be compounded if they are accompanied by tax increases".
Equally certain was that the Federal Reserve would hike rates yesterday. It duly delivered; the Fed raised rates for first time since 2023 and pencilled another this year. Some read it as hawkish; the yield curve flattened as the 2yr jumped to fresh cycle high 4.74% and the 30yr yield dipped to 5.33%, from a high earlier this week at almost 5.4% and the benchmark 10yr yield is back below 5%. This was the necessary clearing event equity markets needed and while Wall Street dipped, led by financials and energy, tech is firmer and futures are looking brighter with the S&P 500 looking to open at its 50-day line at 7,612, with NDX futs also approaching the 50-day line at 29,173. The hike was not one-and-done, but the dot plot that shows where policymakers think rates will be was not aggressively hawkish.
President Trump blamed others for the Fed raising rates against his wishes, saying “I’m relying on Kevin, but he’s got, you know, a very tough board, he’s got a board that was put there by other people. I talked to Kevin, and I said, ‘You might as well vote with the board. It’s not going to matter.’” The thing is...from tariffs to the Iran war to the 6% fiscal deficit it's Trump's policies that are driving a fair chunk of the inflation impulse. Or blame Canada? ...bigger, longer, uncut...in the 1999 South Park film the song 'Blame Canada' encapsulates how Americans scapegoat their northern neighbours. Trump must be a fan, even if their recent rebrand as 'South America' pokes fun at his renaming fetish (Lake America, Gulf of America, etc). Trump branded the European Union’s invitation to Canada to become an Associate Member a “hostile act". “I think it’s laughable ... Canada has been a terrible trade partner,” he said.
With USD firmly bid post-Fed cable broke decisively below its 200-day moving average with the BoE expected to leave rates on hold today. Sterling needs to weaken – the BoE cannot hike rates into what's chiefly a supply shock – this is not 2022 and it's not the US, where the economy is much stronger and benefitting from the AI boom. We've got all the crowding out effect in debt markets without any of the benefits...it's not a time to hike and the currency ought to weaken. It's important to distinguish how the calculation for the BoE is rather different to the Fed.
The MPC will be worried about inflation becoming more entrenched the longer the conflict goes on, but there is yet no strong evidence of second-order effects on prices. The labour market is weakening and wage growth slowing. Risks are asymmetric; although the economy has been resilient, more so than expected, risks to growth are skewed to the downside more than they the inflation risks are to the upside. They won't end gilt sales but cutting sales at the longer end makes sense.
Crude prices have materially backed off their highs. Trump says the war with Iran may near its end (take with the usual pinch of salt), as the fighting between Saudis and Houthis escalates. Perhaps of greater importance Saudi Arabia said it expects to restore about half of its East-West pipeline capacity within days and full flows in six weeks after drone damage. It's also temporarily shipping more crude through the Strait of Hormuz with US military support.
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