Central Bank update
In each case, the comments were perhaps a little more geared to tightening monetary policy (through hiking interest rates) than some might have hoped.
It’s a reminder that whilst the market may have declared inflation dead, Central Banks haven’t quite done the same, even after the Fed’s big turnaround at the start of the year.
What did they say?
First, the Fed. The US Central Bank left rates unchanged, as expected, but Fed Chair Jay Powell indicated that some of the weakness in inflation could be “transitory”, so didn’t see any reason to move from their current stance.
That disappointed those looking for a rate cut this year, and the market-implied probability of a rate cut this year duly fell (at least a little bit).
As for the Bank of England, Governor Mark Carney presented the quarterly inflation report this week and commented that the market wasn’t pricing in enough rate hikes. There was, of course, an important proviso; the Bank continues to assume a smooth Brexit (assuming this means “no-deal”).
Carney stressed that future monetary tightening would be “gradual and to a limited extent”, but there would probably be more frequent interest rate increases than the market currently expects.
And then there was the ECB – where, governing council member Jens Weidmann argued that the ECB should continue to exit from its unconventional monetary policy.
It’s not unexpected for the President of the Bundesbank to be relaxed about inflation, but this comment came alongside higher than expected Eurozone inflation in April, albeit still below the ECB’s target.
What does this mean for portfolios?
This doesn’t mean too much for portfolios over the short-term, but it’s worth remembering that the market consensus is for Central Banks to be on hold for a while.
This week has just been a small reminder that that view might be a bit too sanguine. If we do see global growth re-accelerate in the coming months, which could be positive for risky assets, we should expect Central Bankers to start talking a bit more about normalising interest rates.
The nirvana of decent growth, no inflation and interest rates on hold might be too good to be true. All that said, our guess is that it won’t have much impact on risky assets, because the risks to growth remain quite balanced, but it could create a bit of noise over the next six months.
One area of focus for us at the moment is the impact of climate change on financial markets. There are a range of ways we see this happening, from the composition of indices, corporate profitability, government policy, and corporate behaviour.
It’s not something we expect to have a big impact over the next three-six months, but over time we really expect to see the implications begin to feed through into financial markets.
We will particularly see this in terms of technological development – where we will see winners and losers – and in terms of valuation – how markets value future cashflows.
We will also see changes to regulation, around renewable energy, the supply chain, and a whole host of issues that could impact companies over time.
This is something we are focusing more on at Moneyfarm and will outline our thoughts more in the future.