• Home/
• Fixed Income

David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

ECB's Lane Urges 'Steady Pace' of Rate Hikes to Minimize Risks

This article from Bloomberg may be of interest to subscribers. Here is a section:

Officials attending the Federal Reserve’s Jackson Hole gathering signaled the ECB is prepared to at least repeat the 50 basis-point hike enacted in July, with some not excluding an even larger increase. Executive Board member Isabel Schnabel urged “strong determination to bring inflation back to target quickly.”

While Lane didn’t spell out whether he’d oppose a 75 basis-point step, his comments suggest officials would need to see the need for a higher “terminal rate,” or high point of the current hiking cycle, for him to support such a move.

The Irish official said a “multi-step adjustment path towards the terminal rate also makes it easier to undertake mid-course corrections if circumstances change.” If new data called for a lower terminal rate, “this would be easier to handle under a step-by-step approach,” he said. 

Among the more cautious voices on the Governing Council is Executive Board member Fabio Panetta, who said last week that policy maker must tread carefully as a significant economic slowdown would ease inflationary pressure. 



Read entire article

Truss, Sunak Under Pressure to Clarify UK Energy Bills Support

This article from Bloomberg may be of interest to subscribers. Here is a section:

With just 10 days to go until Boris Johnson’s successor as premier and Conservative Party leader is announced, neither candidate has detailed how much assistance they’ll provide to families and businesses who face soaring energy costs, despite Chancellor of the Exchequer Nadhim Zahawi conceding that the current support package is “not enough.”

Whichever candidate wins the Tory leadership contest, addressing the impact of rocketing energy bills will be at the top of their in-tray after Ofgem said on Friday that a price cap on average annual energy bills would rise to £3,549 ($4,206) in six weeks’ time. That’s 178% higher than last winter and 80% more than at present. 



Read entire article

Hawkish Jackson Hole Surprise Will Pop Credit's Summer Bubble

This article from Bloomberg may be of interest to subscribers. Here it is in full:

Any sign from this week’s Jackson Hole symposium of more aggressive rate hikes to come will whack credit markets, which have already started to give back summer gains. Misplaced optimism about the US inflation and economic outlook squeezed spreads to unsustainably tight levels, leaving debt vulnerable to a fall that will be exacerbated by dwindling liquidity.

US high-grade bonds got overbought as fund inflows chased better returns, despite a barrage of issuance which will likely resume in September. The high-duration debt stands to lose most from a more hawkish Fed.

Spreads have almost 25 bps to go before hitting the July wide at 160 bps, but investors are keeping powder dry for a move back to May 2020 levels above 180 bps. That would be a fairly extreme move for a market that tends to move in 1-2 bps daily increments, but pre-Labor Day lack of liquidity provides scope to gap out.

Junk’s summer gains were led by the riskiest bonds, which would be battered most by a higher rates/lower growth environment. Some are waiting for a pummeling to 800 bps -- from 432 bps currently -- before buying in.



Read entire article

Larry Summers on Inflation and 'the New McCarthyism'

This interview has some interesting nuggets. Here is a section on male employment:

We have a large number of people who are estranged from our economy. In 1960, 5% of men were not working between the ages of 25 and 54. Today it’s more like 15%. If 15% of men are not working at any point in time, then a quarter of the people will have been out of work for a year or more over a four or five-year period. That’s destructive to the economy's productive potential. It’s destructive to their families. It’s destructive to the areas in which they live. It’s destructive to the moral fabric of our national life.



Read entire article

Layoffs Are in the Works at Half of Companies, PwC Survey Shows

This article from Bloomberg may be of interest to subscribers. Here is a section: 

That’s a key finding from a survey released Thursday by consultant PwC, which last month polled more than 700 US executives and board members across a range of industries. Half of respondents said they’re reducing headcount or plan to, and 52% have implemented hiring freezes. More than four in ten are rescinding job offers, and a similar amount are reducing or eliminating the sign-on bonuses that had become common to attract talent in a tight job market. 

At the same time, though, about two-thirds of firms are boosting pay or expanding mental-health benefits. The most common move: making remote work permanent for more people.



Read entire article

UK Inflation Hits Double Digits for the First Time in 40 Years

This article from Bloomberg may be of interest to subscribers. Here is a section:

“UK CPI inflation surged in July amid rising food prices that helped lift the rate above market expectations. The peak is still likely come in October, when energy prices are due to be increased again -- we see annual CPI moving to a little below 13% at that point. With inflation now more than five-times the Bank of England’s target, the question isn’t whether the central bank will tighten, it’s by how much? Today’s reading makes it more likely than not that the BOE lift rates by 50 basis points in September -- our baseline ahead of the data release was for a 25-bp move.”

Economists are growing increasingly pessimistic about the UK, with the risk of a recession now seen as far more likely than not due to rising cost pressures. The BOE expects a recession to start in the fourth quarter, lasting into the early part of 2024.

The central bank expects inflation to surpass 13% later this year when regulators allow energy bills to rise again. That would mark the worst reading since September 1980, when Margaret Thatcher’s government struggled to bring a wage-price spiral under control.

 



Read entire article

Email of the day on the big question

Q: Are we in a bear or a bull?



Read entire article

Bond Traders Dismiss Stock-Market Rally as Misguided Euphoria

This article from Bloomberg may be of interest to subscribers. Here is a section:

Strategists at Citigroup Inc., using a mix of spot and forward curves to help construct a predictive model, now say that there’s a greater than 50% chance of a recession over the next year. 

“It’s a perfect storm now with both sides of the curve causing the inversion, and making it likely to continue,” said Jason Williams, a strategist at the New York-based bank. “Given the strength of the labor market and still high inflation, there’s no reason for the Fed to slow down it’s hiking.”



Read entire article

Email of the day on surging electricity prices

I know you have consistently highlighted the challenges that UK households will experience in relation to their energy bills, and just today they are saying that "typical" households could be paying nearly £600 in January, money that most just can't find. Already consumers are a collective £1.3 billion in arrears on their bills, with an expected 86% hike in the energy cap expected on 1 October.

But far less is said of the impact on businesses, and on this I can shed some very specific light. I own a small business, an indoor children's play centre. On 1 December last year I renewed my energy supply contract, and faced with an increase then from 15p/kwH to 20p/KwH I opted to take just a 1 year renewal, with gas prices fairly stagnant until then as you know.

I have been informed today that when I come to renew once more on 1 December, I am going to staring at a tariff of anywhere between 50p/kwh to as much as 89p/kwh. I was also told in no uncertain terms by the 'sales' person at my current supplier, that they are trying to migrate away from small and medium business in this environment, and are deliberately pricing us away. the daily fixed standing charge will move from £83 per month, to potentially as much as £1,000.

For context, my own energy bill is going to shift from £20k per year to closer to 60k-£70k. This is going to be catastrophic for U.K. businesses, as many will be left in dire straits, unable to keep the lights on, and customers cool (in summer) or sufficiently warm in the winter. So many businesses in the hospitality sector especially are saddled with the burden of Covid "bounce back loans", delayed VAT repayments, and of course huge inflation on input costs with a consumer at breaking point. Business closures = higher unemployment...it is looking particularly dire here in the U.K.



Read entire article

Cooler Inflation Takes Fed's Rate-Hike Size "Down to the Wire"

This article from Bloomberg may be of interest to subscribers. Here is a section:

“This is a necessary print for the Fed, but it’s not sufficient,” Pond said. “We need to see a lot more. You can think about this print as sort of like the weather -- it’s better today than it has been over the past few days. But it’s still summer. There’s still a lot of humidity out there. It’s not great. So it’s in the right direction. But we’re certainly not there yet.” 

For Diane Swonk, the chief economist at KPMG LLP, the Fed is now hedging against risk of future supply shocks as well as combating current inflation and will likely favor a 75 basis-point increase.

“The Fed is no longer willing to rest on their laurels on a one-month move,” she said. “The greater risk for the Fed is to stop too soon than stop too late. It will take a lot more cooling than this for the Fed to shift its decision rule, although in this economy, September seems an eternity away.”



Read entire article