Musings on Markets (Dated 07/08/2022)

Markets were little changed this week. The most notable event was the revision of the Bank of England’s guidance on UK inflation & Growth. As it hiked rates by 0.5% the Bank of England updated its peak inflation forecast to 13.3% in October 2022, and is now forecasting a five quarter long recession in the UK. Market reaction was mixed. A recession on the horizon could mean that the pace of rate hikes is likely to slow back to more modest 25 bp rises. Inflation is being driven by high energy prices, particularly British Gas Futures which are still elevated at 370 GBP/thm, 3.7x higher than a year ago. WTI Crude Oil, though has been falling since late July, from $100ppb to $89ppb this week, as slowing global consumer growth and demand slips. Agricultural commodities prices have also seen a pullback on the elevated prices seen over the past year.

In the US non-farm payrolls were published on Friday, coming in at 528k vs 250k estimated, while the unemployment rate dropped to 3.5% vs 3.6% (3.6% prev.). Resolve in the US jobs market supports the FED’s view that the economy is resilient enough to withstand its rate hiking path in an effort to bring inflation under control.

The US, with its geographic isolation from Ukraine, and vast energy reserves, the US states arguably faces a clearer set of challenges than Europe, with US inflation more heavily tilted towards being demand led, while price rises in Europe are inextricably linked to the evolving situation in Ukraine.

Nevertheless, the outlook for developed economies remains consistent – weak growth and elevated, persistent inflation. 

Concerns over demand have been feeding through to commodities with Brent Crude trading off it’s earlier highs of c.$120 / barrel to $95. Falling commodity prices should help cool inflation as growth in developed markets slows.

In terms of Credit GBP, HY Corporates returned c.78 basis points (bps) on the week, with Financials out-performing Non-Financials each returning c.80 bps, and 78 bps respectively. In terms of rating, Double BBs returned 72 bps, whilst Single Bs and CCCs returned 89 bps and  96 bps respectively.

At time of writing (Fri 5th, Afternoon) The FTSE is up c.0.3% on the week. GBP / USD is down c.1.5% on the week at c.1.2056. The spread on the iTraxx Crossover (XOVER) – a proxy for the market’s assessment of credit risk (the greater the spread, the greater the perceived risk) increased by c.8ps over the week to 518. 

Reporting

This week we had Punch Taverns 3Q22, Rolls Royce 2Q22, Newday 2Q22, Encore 2Q22 and Travis Perkins 2Q22.