A good week for equities, the FTSE 100 in particular as it gained almost 2%. Sterling did lose some ground against the US dollar in the second half of the week after comments from the Bank of England, however, the pound continues to hold the $1.3 level. Markets in the US made smaller gains on the week as did stocks in Europe.
The Bank of England left interest rates where they are as they announced their expectations for growth and inflation for the coming year. Mark Carney in his inflation report press conference expressed the view that he believes the gilt market is currently mispricing interest rates. Consensual views are often wrong and the consensual view on bond yields is that they will rise as the leading developed central banks will start to tighten monetary policy in the coming year. Alan Greenspan said this week that he believes the bond market is a bubble waiting to burst. Those of us old enough remember when he described the Dow Jones at 4000 showing irrational exuberance before it ripped to 10000. Investors hope a rise in yields would indicate that global growth continues. Bond markets appear to continue to take a different view to growth and inflation than equity markets do. Inflation in the UK running at almost 3%, and according to the Bank’s expectations will get there later in the year, before falling back, yet 10-year UK gilts remains just above 1%. US treasury yields at 2.26% remain substantially lower than where they were at the start of the year or post the Trump election.
The savings ratio falling to a multi-year low, at 3% the lowest since 2008, is starting to make headlines along with the level of credit within the UK economy. It’s a similar picture for the US economy, as well as savings rate falling, average real disposable income is not growing. Central Bankers, by cutting interest rates encouraged consumers to spend and stimulate growth, not saving. It would now appear have succeeded. If credit cards are maxed out and consumers have nothing to fall back on that may cause central bankers a whole new set of headaches, particularly if they want to start to normalise interest rates.
Looking briefly to the week ahead, after Friday’s jobs report this week it is the turn of inflation for the US economy. On Thursday, we get the latest producer prices and on Friday consumer prices. As for the UK economy on Monday we get the latest house price index from the Halifax. House prices are expected to rise 2.2% year on year. On Thursday, we get Industrial and Manufacturing Production for the month of June.
We also get inflation data for the euro area this week. After last month’s dip and Mario Draghi’s belief that deflation is beaten, we shall see if inflation in the euro area has picked up in July. With the recent strength in the euro that could be questionable.