The doves meet the hawks over the pond

After yesterday’s Bank of England inflation report it rather would appear that the Federal Reserve could be the only central bank to look to tighten monetary policy in the short term. Despite the recent improvements to wages and retail sales as well as a blossoming housing market, the Governor of the Bank of England virtually ruled out the chance of a rate rise until at least the middle of next year. The reasoning for keeping rates where they were related more to the strength, or lack of, the global economy, than some improving signs in the UK economy.

 

Janet Yellen on the other hand reiterated in a speech on Wednesday that she felt December was a “live possibility” for a rate hike. That does seem to remain a slightly ambiguous comment, but 2-year yields on US treasuries rose to their highest level for over 4 years, and 10 year US treasury yields likewise rose. Perhaps the market is now beginning to believe that the Federal Reserve will move in December.

 

Equity markets had a lackluster day on the back of the central bank comments, the Ftse 100 drifted lower. A lot of the volatility we saw of a couple of months ago has subsided. The Ftse 100 has traded in a range of 100 points between 6350 and 6450, and is currently inn the middle of that range, where it was a month ago.

 

The Federal Reserve may be looking to raise rates despite a mixed economic picture, however the dilemma for equities remains. The leading German equity index yields almost 4%, whilst the 10-year German bund yields just over half of one percent. Shell International corporate bonds that mature in 2 years yield close to 1%, yet the equity close to 6%. Which of those asset classes is the risky one? Time will tell but one must assume that status quo cannot last forever. 

Posted on November 6, 2015 .