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This week

The first thing any mathematician will tell you about the field of number theory is that a perfect number can be defined as a positive integer that is equal to the sum of its positive divisors, excluding the number itself. Simple stuff…

They’ll also tell you that the number 6 is an interesting example as it represents the smallest of these perfect numbers, a notion it seems the Bank of England (BoE) will now very much disagree with. Having raised rates for what was once thought to be a perfect 6th time in 6 meetings, the bank is now indicating that more hikes could well be on the way. Thursday saw the BoE raise rates by 0.5%, the highest such move in 27 years, with borrowing costs now sitting at 1.75%, in a bid to curb spiralling inflation.

With the move almost wholly anticipated by markets, the real headline was that the bank expects the domestic economy to slip into a drawn out recession by the end of this year. However, the devil (666) is in the detail. The bank elaborated, saying that although the coming recession will be similar to the shallower slump experienced during the 1990s, it will be far less than the hit from Covid-19 and the downturn caused by the 2008-09 Global Financial Crisis. However, the bank does expect inflation to peak at 13.3% during October, which will put it at its highest level since 1980.

On the news, it was sterling that was hit for 6, falling back towards $1.21 on the USD, with gilt yields recovering throughout the day. Developing something of a 6th sense for the BoE’s actions now, futures were pricing in a further 0.25% rise for the BoE’s next meeting in September.

It wasn’t just on Threadneedle Street that uncertainty reigned. Over in the corridors of power at Westminster they were also at 6s and 7s over how to handle the cost of living crisis. Liz Truss, the front-runner to become the next PM, commented that the BoE's forecasts underlined the need for an emergency budget and tax cuts. Her rival for the role, former Chancellor, Rishi Sunak, said gripping inflation was imperative for any future government.

Staying on the theme of politics, much market volatility was created this week by a brief but controversial visit to Taiwan by US Speaker, Nancy Pelosi. Her visit, as part of a wider Asian tour, sparked fury in Beijing after she ignored its warnings not to travel to the island, heightening geopolitical tensions in the area. It was 6 of 1, half a dozen of the other as Chinese Foreign Minister Wang Yi condemned her actions with some furore "Those who play with fire will not come to a good end and those who offend China will be punished."

The first Friday of the month brings with it a raft of US labour data, including US Non-Farm Payrolls which came in much stronger than anticipated, seeing 528,000 Americans join the work force over the last month compared to estimates of 250,000. Average hourly earnings also crept up further than expected, rising 0.5% versus estimates of 0.3%. A tricky set of data for the US Federal Reserve then, showing that increasing amounts are joining the workforce and being paid more to do so. This should only add to inflationary pressures already being felt, a phenomenon the Fed are trying 6 ways to Sunday to halt.

Next week

With central banks around the world ushering in higher rates and warning of recessions to come, it is little surprise that sentiment is hitting lows not seen since the Global Financial Crisis of 2008-9 and beyond.

A little confidence can be a wonderful thing though and Monday will be sure to test that notion as the survey company Sentix releases the results of its latest questionnaire, asking 2,800 investors and analysts which to rate the relative 6-month economic outlook for the Eurozone. The data should act as a leading indicator of economic health as investors and analysts are highly informed by virtue of their job, and changes in their sentiment can be an early signal of future economic activity.

It’s the little things that can make a big change and carrying on the confidence theme, the following day sees US small business sentiment index data released, gauging how smaller firms are coping on subjects such as labour markets, inventories and sales, capital spending, inflation and wages. Small companies in the US are defined as independent enterprises that employ between 1 and 250 people and should give a more regional feel to business sentiment figures.

Focus should remain on the world’s largest economy during the middle part of the week as key US inflation data is released on Wednesday. With inflation a hot topic and the US Federal Reserve giving out mixed messages about how much they will have to hike rates by the end of the year, the numbers will make for fascinating reading.

The week will be wrapped up on domestic shores as the Office for National Statistics releases the nationals GDP figures. Generally considered the broadest measure of a country’s economic health, the data should cause heightened volatility on the markets, especially as investors watch out for any signs of recession.

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 5 August 2022.