This week

It was the best of times, it was the worst of times begins Charles Dickens magnum opus, A Tale of Two Cities, the perfect encapsulation for another volatile week for global markets. Seeing wild swings in both directions, it could be described more as a tale of two central banks this week, as both the Bank of England and the US Federal Reserve raised rates in an attempt to combat the spiralling inflation taking hold of both economies.

The tone from the US central bank has been that of a Bleak House in recent weeks, threatening to raise rates by 0.75% to combat the cost of living crisis. Following a string of press conferences from Jay Powell and senior colleagues, all extoling the need to raise rates at a faster pace, global markets have been severely spooked in the process. However, Wednesday saw the Fed raise borrowing costs by only 0.5%, the largest hike in 22 years but smaller than feared.

Voting 10-0 in favour of the rise, the Fed told reporters that a rate increase of as much as three-quarters of a percent is not something officials are "actively considering" and further increases of the same size should be “on the table” at next two meetings, quashing fears that they would move at too quick a pace.

The sense of relief was palpable amongst investors as major US indices enjoyed their best day since April 2020, the S&P 500 seeing a near 3% rise. The yield on the 2-year Treasury also dropped 13 basis points to 2.64% whilst the USD sank against a basket of other developed currencies.

Thursday saw Andrew Bailey, the Governor of the Bank of England (BoE), also raise rates, this time by 0.25%, the 4th time in the last 4 meeting of such a move has taken a place. Unlike their American counterparts, the decision was not unanimous, with the vote split 6-3 to raise rates to their highest since 2009, at 1%. The bank did warn that the UK economy is set to shrink next year in the face of soaring consumer prices, pushed higher by the recent Russian invasion of Ukraine.

With the BoE’s decision not scheduled to be announced until Thursday lunchtime, the what the Dickens moment went to Halifax building Society, who wrote to some customers on Tuesday, informing them of the central bank’s decision, a full 48 hours before its statement. With this in mind, it would seem the BoE have indeed lived up to some Great Expectations.

Next week

With markets still digesting the Bank of England’s (BoE) latest rate rise, the coming week should help those following the decisions made on Threadneedle Street understand further just what the bank’s thought process is.

Starting off the week, we will hear from Monetary Policy Committee member, Michael Saunders, who will be speaking at an event hosted by the Resolution Foundation and the Money Macro and Finance Society. Such events tend to produce unexpected questions and can give us a greater insight than mere scripted press conferences. Such engagements are often scrutinised by investors for clues as to future rate policy and should induce increased market volatility for the entirety.

Staying on domestic shores, the British Retail Consortium (BRC) releases its sales monitor. With the BoE forecasting that inflation could reach 10% later on in the year, the High Street is already starting to feel the results as consumers tighten their belts. The numbers lead the government-released retail data by about 10 days, but has a narrower focus as it only includes retailers who belong to the BRC and so have a slightly muted impact.

Attention should then shift to the US as the world’s largest economy releases its inflation figures. With prices having risen to 8.5%, its highest in 40 years, all eyes will be on the Bureau of Labor Statistics for their month on month print. The previous week saw the US Federal Reserve raise rates by their highest in 22 years by 0.5%, a move that should be followed be several subsequent hikes, making this data all the more significant.

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 06 May 2022.