May-be now May-be not

As the thorny subject of UK interest rates rumbles on, the FT leads on Thursday with an interview with Martin Weale, an external member of the monetary policy committee, who is quoted as "proposing baby steps rate rises". The headlines appear more dramatic than the content of the interview, Mr Weale hedges his bets slightly as he concedes there are risks to raising rates to soon. The term that is often used by market commentators is "hawk" or "dove" to describe a market professional’s position on inflation and interest rates. Hawks adhere to the view that interest rates should not remain too low for too long and risk inflation, while the doves on the other hand believe that rates should stay lower for longer to ensure economic recovery and worry about the inflation risk at a future date. Mr Weale is by the looks of things a hawk, having called for higher rates in 2011, and was opposed to the Bank of England's forward guidance policy. With UK interest rates close to zero, the only way is up as the saying goes, the continual debate is when, how much and how quickly.

Just to prove that the economic recovery will not be smooth the US released first quarter GDP data for 2014. The economy shrunk at a worse than expected annualised rate of 1%. The fall was blamed once again on the bad weather that America suffered from at the start of the year. The equity market reacted in a muted way as the data is seen as historic, the more recent data indicates that economists expect growth to rally towards a pace closer to 3% for the rest of the year. The US bond market, that has been the scene of much speculation, also reacted in a muted way as the 10-year yield traded at 2.43%. Despite the continued uncertain backdrop, the Vix remains close to its all time lows, indicating at least for now that those who sold in May will have to wait a little longer to reinvest.

Posted on May 30, 2014 .