Dammed if you did, dammed if you did not

So now we know the Bank of England went for it, voting by a small majority in favour of a cut, and the Federal Reserve held back for whatever reason they seemed to make unclear. If they want further evidence of a slowing economy, they got it fairly quickly from the latest unemployment report released yesterday, as initial unemployment claims totalled a seasonally adjusted 249,000 during the week ending July 27, versus the 235,000 consensus estimate. The latest PMI report recorded the manufacturing sector contracted in July for a fourth consecutive month. That was the highest weekly initial jobless claims figure in nearly a year. Neither stock market took the decision well. The FTSE 100 fell over 1% as investors probably had the old travel and arrive feeling, accompanied by the cautious comment from Bailey on when to expect the next move from the Bank members.

Gilt yields fell, after the news; the yield on the 2-year is 3.7%, down from 4.5% at the start of the year.  That further fall in yields suggests the market is gaining confidence we could see further cuts. It may be Bank of England policy members want to see how the new government manages further pay awards, amongst other things, before signalling they are happy to go again. We now have GPs working to rule as they look for pay awards in excess of current inflation.

The S&P fell over 1% and the Nasdaq over 2%; the latter is close to giving back 10% of the gains made in the year so far. The latest Personal and Consumption Expenditure Index, the Fed’s measure of inflation, reported last week a small month-on-month rise as the annualised rate remains above the Fed 2% target. Investors will start to fear, just as the Fed was slow to the party to raise rates as price rises took hold during the pandemic, they will be slow to leave. What is even stranger about the Fed’s move is deflation is a bigger headache for central bankers than inflation. Remember Powell’s comments from a few years back describing the concept of inflation targeting. That means the central bank will be more inclined to allow inflation to run higher than the standard 2% target before hiking interest rates. It may also have been politically less sensitive if the Fed went now instead of waiting till the next meeting in September, which will be that much closer to the US election. All that left equity investors in something of a quandary. The Vix fear index rose to hit its highest level yesterday in almost a year.