High yield – reasons to be positive High yield – reasons to be positive
By Stefan Isaacs
There are undoubtedly reasons to worry about taking credit risk today. Central banks are tightening fast. The Fed just raised rates by 75 basis points (bps) bps as markets expected, while the Riksbank raised its policy rate by 100 bps with more on the way from the European Central Bank, Bank of England and others. Deutsche Bank points out that the ratio of global hikes to cuts over a rolling 12-month period has been as high as 25:1 recently having not being above 5:1 over...
22 September 2022
Quick Comment
BoE not playing the ‘not to be out-hawked by the Fed’ card
By Bond Vigilantes
The BoE went for 50bps today, taking the base rate from 1.75% to 2.25%, which was in line with market expectations. There were 5 members in the camp for 50bps, 1 for 25bps, and 3 for 75bps. Reading the summary of the meeting, it is clear that the November meeting will be more meaningful: we will have heard from the new Chancellor, and we will have his plans for tax cuts and spending increases in greater detail. We will also presumably have a better idea of gilt issuance, and the forecasts for growth and inflation by then will be able to take into account more fully the utility price cap – which has only just been announced. In that sense, this meeting feels a little low on “high conviction” monetary policy views. This meeting seems like a placeholder until the time at which the MPC can really look at the details of the policies coming from the new government, and the ways in which the economy starts to behave on the back of them. They are worried about cyclical downside risks and about domestically generated inflation. And those are contradictory and highly complex.
One interesting thing: do you need to hike to oblivion to bring inflation back down (like the Fed)? Or is the BoE right: the downturn that’s coming, and the base effects that are always and everywhere inevitable, will be enough to do the job?
One last dance for US core CPI?
By Bond Vigilantes
The market seems fairly confident that US inflation has finally peaked and the YoY rate will continue to trend lower, both for headline and core inflation. While there are clear signs that inflation is in fact cooling (see for example commodity prices, shipping rates or even money supply), underlying inflationary pressures remain extremely elevated, especially in the more sticky parts of the CPI basket. This was evident also in the latest inflation report: the decline in the volatile items, such as energy and used cars, was more than offset by a large increase in the sticky components (rents, medical care,…). This part of the CPI report is particularly large and it plays an even bigger role in core CPI. Add to that the “base effect”: last year inflation was relatively low and as a result it only takes a 0.37% MoM increase in core CPI to make a new YoY high. This doesn’t seem particularly hard to achieve given all the underlying pressures currently in place and given core CPI has averaged 0.5% so far this year while median CPI is above 0.7%.