The small July/August rally fizzled out when a particularly hefty US CPI print extinguished any hopes of a FED pivot and the dollar continues to be all powerful. Recent PMI numbers from most developed economies make dismal reading and coupled with still elevated inflation expectations and collapsing consumer confidence it is hard to see these reversing any time soon.

The Federal Reserve delivered another 75bp hike accompanying it with increased hawkish language and it is clear that they have every intention of keeping going, forward guidance is not as dead as some anticipated. The US Treasury curve has inverted and we haven’t seen a 4% handle to short end yields in quite some time.

The ECB delivered their second 75bp hike amidst the backdrop of surging energy prices and there is a chance that the Eurozone is already in recessionary territory in Q3. Germany now appears to be slowing the most and it looks to be a long winter. Eurozone employment numbers however continue to be strong which is some consolation and France is better insulated from Putin’s pain.

We have just had a further 50bp from the Bank of England when the market expected 75bp (3 MPC members did vote for that magnitude), and beleaguered Cable suffered another leg down. To be fair, they were waiting for the next day’s ‘fiscal review’. The chancellors tax cuts, energy price caps and dramatic fiscal loosening are all supposed to stimulate growth back to a 2.5% target. This puts fiscal policy in direct opposition to the monetary tightening QT path of the BoE and involves raising huge funds from the sale of Gilts just at the time that the Bank itself begins active sales of Gilts from its balance sheet. They are also about to start selling nearly £13 billion of corporate bonds from their £20 billion APF pot but at a projected run rate of £200MM a week this should be digestible by the market.

Credit spreads have been relatively stable throughout this period with orderly widening in EUR spreads and Sterling spreads having had a look at wides for the year rallied back and remain supported. There still is some complacency regarding potential default rates rising in lower grade credit but with precious few being able to access the primary market to refinance it looks inevitable. In High-Grade credit the primary market has managed to price a number of issues but pricing power is in the hands of lenders rather than borrowers.

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