Markets Bring More Of The Same As UK Inflation Worries Mount

WHERE WE STAND – The ‘big sexy turtle’ has got a real problem on his hands.

Don’t worry, I’ve not gone mad, that’s actually the nickname that Mark Carney coined for BoE Governor Bailey a few years back. Better than ‘unreliable boyfriend’, at least!

Anyway, the issue, it’s inflation yet again, after another ugly CPI report yesterday. Headline prices rose 3.8% YoY, the fastest pace since last January, while core & services CPI both rose at their most rapid pace since April. All in all data which, pretty clearly, conducted the MPC’s four ‘hawks’ and their preference to have held Bank Rate steady last month – a group which, of course, Bailey was not part of.

The worst of this, though, is unlikely to be over, with headline inflation heading to, and possibly above, 4% YoY by the time that summer is out. At that stage, we need to start worrying about a renewed intensification in earnings pressures all over again. The BoE have assumed that this follow-through will amount to nil in their latest forecast round, which seems folly to me.

Still, despite all that, I remain of the view that the market is far too hawkish when it comes to its view on the BoE policy path, pricing less than 50bp of Bank Rate cuts over the next 12 months. Given the significant downside risks facing the UK economy, the sizeable fiscal tightening on its way in the autumn, and the rapid pace at which the labour market is weakening, risks to the outlook tilt clearly in a dovish direction. To me, the Mar and Jun 2026 SONIA futures still represent value from the long side, with short GBP (in the crosses) subsequently also remaining attractive.

Elsewhere, we had a somewhat comical CNBC interview from possible Fed Chair candidate David Zervos, including lines such as "Trump's views on rates...have in many ways been correct", “the Fed isn’t independent”, and "he's [Powell] operating politically from the left". If you were drawing up a bingo card with phrases that the President would want to hear from Powell’s successor, Zervos would’ve achieved a ‘full house’.

I did suggest, back in March, that Zervos might well end up being the next Chair, and he’s probably done his chances of getting the gig no harm at all with yesterday’s sycophantic TV appearance. Given his long-running views of a ‘2 and 20’ neutral policy setting (representing the fed funds rate, and the balance sheet as % of GDP respectively), and yesterday’s exclamation that he’d be “very excited” to use tools such as QE if required, I’d wager that nobody on the street is anywhere near bullish enough on equities if Zervos does indeed get the job.

If he ends up doing the whole ‘no-haircut-until-a-rate-cut’ thing all over again as Chair, then the ponytail will have morphed into a buzz cut by June next year.

Anyhow, with that being a sensitive subject round here given the pace at which my hairline is receding, I’ll move on, to markets which brought us ‘more of the same’ yesterday. That ‘same’ of course, is FX & FI complexes that continue to plod along in sideways fashion – save for some downside in the Kiwi after a dovish 25bp RBNZ cut – and an equity market that slipped, with ‘big tech’ doing most of the damage.

Of course, I’ve had plenty of questions as to why the tech sector has started to slide, to which I don’t really have an especially solid answer. Clearly, the political environment has grown less favourable with the Trump Admin seeking a stake in Intel, and a ‘quid pro quo’ arrangement in terms of AMD & Nvidia China revenue sharing, but both of those are ‘old news’ by now.

Instead, I’d argue that what we’re more likely to be seeing is just a broad-based momentum unwind, where stocks that have rallied 50/60/more% from the April bottom see some wind come out of their sails, probably amid some de-risking into Chair Powell’s remarks at Jackson Hole, which has then been exacerbated by typically thin summer trading conditions.

In any case, I remain an equity bull, and a buyer of dips, viewing this recent swoon as more of an example of some froth being taken off the top of the market, a healthy feature of any upswing, as opposed to a sign that ‘the end is nigh’. Strong earnings growth, a resilient underlying economy, and calmer tone on trade, should all keep the path of least resistance higher, while any potential Fed easing would probably provide a helping hand as well.

LOOK AHEAD – It’s ‘flash’ PMI day today, though the surveys seem unlikely to tell us much by way of fresh information. On the whole, the figures should show the global manufacturing sector continuing to contract, services continuing to underpin the expansion, and price pressures remaining relatively intense. Market-moving they likely won’t be.

Elsewhere, a busy US docket lies ahead, with the weekly jobless stats highlighting things, where the initial claims print coincides with the survey week for the August jobs report. Also due today are the latest existing home sales stats, plus August’s manufacturing survey from the Philly Fed.

On the policy front, we’re due to hear from the Fed’s Bostic, and SNB’s Martin, through the day, while the agenda for the Jackson Hole Symposium is also set to be released at some point tonight. We already know, of course, that Chair Powell will be speaking at 3pm London/10am NY on Friday.

Finally, a few notable earnings releases are in the mix as well, with Walmart (WMT) reporting before the open, before Zoom (ZM) and Workday (WDAY) release figures after the closing bell.