Market Recap 6/23/2023

Each week the market is driven by a different narrative.  One week it’s the debt ceiling.   The next it’s all about AI.  Then you get a bout of recession fears followed by jitters about inflation.  Rinse and repeat.  


It was a pretty quiet week in the U.S., so all eyes were on the inflation problems in the U.K. and what rising yields might mean for both their economy and the beleaguered pension system there.  It all started with the latest U.K. inflation report, which wasn’t good.  As you can see below, UK inflation continues to accelerate.  


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The Bank of England met the day after the inflation numbers came out and they surprised the market with a half-point rate hike.   And they promised more to come.  As you might expect, yields across the curve increased, with a notable spike in 2-year rates.  That peak you see below in late September was when UK pensions managed to implode and the Bank of England basically had to step in and save the day.   Well, we firmly took out that high this week.  


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Then you get this Economist cover on Friday.



A PhD student really needs to do a study on Economist covers as contrary indicators, at least when it comes to economic issues.   We shall see how this pans out.  Regardless, the UK inflation issue can be traced, at least in part, to BREXIT.  Apparently dramatically cutting immigration rates in a small economy that relies on foreign workers has resulted in a wage/price spiral.  That’s not what was promised.  


Rates in other countries haven’t reacted as dramatically.  For example, two-year yields here have increased, nowhere near as dramatically.


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But the market narrative is similar.   ‘The Fed is behind the curve and will need to tighten much more,’ or so goes the commentary this week.  Certainly, another quarter-point hike is being priced in – current odds stand at 74%. 



But at the end of the day each country seems to be on their own idiosyncratic path.   Policy makers in the U.K. may very well have to trigger a recession to get inflation under control.   But that’s far from the case in China, for example, where growth is stagnating and inflationary pressures are quiescent.  The People's Bank of China may actually have to cut interest rates in the months to come.  


Where does the U.S. fall on the spectrum?  So far it looks like somewhere in the middle – core inflation is still sticky at just under 5% but not an accelerating problem a la the U.K.   Also, growth is decent and looks stable for now, unlike the outlook in China.  For U.S. policy makers the question is really how much pain do they want to put the economy through to get core prices down to 2%?  To quote an FT piece on Friday:


“However, some traders question the resolve of central bankers. A Bank of America survey of 81 fixed-income fund managers found 60 per cent thought central banks would accept 2 per cent to 3 per cent inflation if it meant avoiding a recession. Just over a quarter thought rate-setters would be willing to generate a recession to lower it further.”  


(Other) Charts We Found Interesting


  1. Existing home sales were basically unchanged in May.



  1. But this is due in part to a lack of inventory. The months of supply is still bouncing around all-time lows. 



  1. Why are inventory levels so low?  Most people selling have to buy again, and who wants to trade in a 3% mortgage for a new loan at close to 7%?    



  1. So what do people do if there aren’t enough existing homes on the market?   They buy new.   The latest housing starts data blew the lights out.  


RTTNews | LinkedIn


  1. More on the difficult situation in the U.K. – wages adjusted for inflation are contracting.   



  1. Stagnant real wages comes at the same time that mortgage rates are repricing.  Many British mortgages are fixed for only short periods of time, and many will reprice in the next few months.  Most mortgages have a current rate less than 2.5% and will ratchet up to between 6% and 7%.   


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  1. This comes at the same time that home prices are already falling nationwide.


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  1. Another summer solstice has come and gone.  The view from Stonehenge on Wednesday.


People raise their hands skyward at sunrise, framed by ancient stone monuments.


Have a good weekend


Charles Blankley
Chief Investment Officer
Gemmer Asset Management LLC


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