The Federal Reserve continues to do a fine job of not upsetting markets.
Jay Powell has managed to drop transitory from his statements, increase the pace of tapering and shift the dot plot to indicate three rate hikes next year without hardly a ripple across risk assets, in fact almost the opposite. A new virus variant is giving people more to think about and there looks to be the beginnings of discontent in the Democrat party regarding Biden’s stimulus plans. Thin holiday markets could exacerbate any volatility that these factors might bring.
The IMF’s annual report on the UK economy warned of ‘inaction bias’ regarding tackling inflation. The BoE finally stepped up to the plate in the face of CPI printing at an unsettling 5.1% and a tightening labour market, to begin the process of normalising rates with a decisive 8-1 vote for a 15bp hike. We are possibly one more hike away from the level at which the Bank can begin to not reinvest maturing Gilts. There is a massive upcoming £38 billion maturity of 4% March 22’s and therefore reinvestment, or not, of proceeds now hinges on the February meeting. Either way the direction of travel is clear, possibly disappointing the one MPC member who consistently looked to experiment with negative rates. One glance at the Turkish lira and the Bund curve (completely negative) shows the folly of experimenting with rates. The ECB has its own inflation problem to deal with and although their PEPP is due to end in March it will be succeeded by their existing Asset Purchase Program. They threw a bone to the hawks by undertaking to begin to scale back purchases by the end of 2022 but still stated that it will run ‘for as long as necessary'.
Some small widening in credit spreads was met with sustained buying and they snapped back in pretty quickly as some chunky portfolio trades took the market short. These are sizeable secondary market allocations into credit and not bitty ETF style flows. Limited primary issuance in Sterling probably helped, although other currencies saw continued high levels of new issues. HY had a testing November as the reality of not being compensated for credit risk returned to investors’ minds.
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