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Bank of England Expected to Conduct 14th Consecutive Hike 

Monetary conditions continue to tighten, US credit rating downgraded, and US markets await labour market print.

At 12 noon today, all eyes will be on Threadneedle Street as the Bank of England are expected to conduct their 14th consecutive rate hike as policy makers continue to tighten monetary conditions to cool inflation. Presently, money markets have fully priced in a 25bps hike while also pricing in around a 28% chance of 50bps hike. Though the period between Threadneedle street’s last hike and now saw many investors edge towards expectations of a 50bps hike, the UK’s softer-than-expected inflation print last month saw investors downwardly revise these expectations. As such, the general market consensus points to a 25bps hike, which if conducted would bring their benchmark policy rate to 5.25%.

On 19 July, markets reacted to a weaker-than-expected inflation print which saw headline inflation has slowed to its lowest level since March 2022. This came as the figure hit 7.9%, missing expectations of 8.3% and marking a considerable slowdown from last month’s print of 8.7%. Meanwhile, Core inflation also slipped to 6.9% on an annualised basis, falling 0.2 percentage points from May’s print.

Six weeks ago, the BoE raised the benchmark policy rate to 5%, brining borrowing rates to fresh 2008 highs. This came after seven members voted for a half-percent rise with the BoE’s

monetary policy statement stating that “there had been significant upside news in recent data that indicated more persistence in the inflation process, against the background of a tight labour market and continued resilience in demand”. Despite the hawkish hike, sterling came under some pressure as markets weighed on recessionary fears with money markets pricing in a terminal rate well over 6.0%. Since their last policy meeting on 22 June, at the ECB’s Sintra Symposium, Bailey maintained “[Markets] have a number of further increases priced in for us, and my response to that would be, well we will see”. Bailey has consistently raised concern over a wage price spiral, though the Governor has commented little on the inflationary impact of the Bank’s QE programme as their balance sheet stands in excess of £800bn.

As we looked at yesterday, rising mortgage rates are continuing to make headlines. This week has already seen the average five-year fixed rate tick up to some 6.37% while the average two year-rate rose past 6.85%. As such, millions of mortgage holders will be eagerly awaiting the impact of the print as money markets and the wider financial market consider the BoE’s next steps.

Markets React to Fitch’s US Downgrade

Yesterday’s session saw markets react to Fitch’s downgrading the US’ credit rating. Fitch cited concerns over the US’ debt-ceiling crisis as a driver behind their decision to downgrade the US’ credit rating from AAA to AA+. Here, Fitch stated that “the rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.

Following the decision, WTI crude futures briefly dip under $79dpb during yesterday’s session as markets reacted the change in rating. The risk-off move also global equity markets take a hit with the MSCI world index slipping a considerable 1.55%. This came as the S&P 500 underwent its sharpest daily decline since April with the index sliding 1.4% while the tech-heavy Nasdaq fell 2.2%, marking its largest daily drop since February.

US ADP

As markets await US labour market print (Nonfarms, unemployment and wage growth) out tomorrow, yesterday markets reacted to a stronger-than-expected ADP Employment Change. Here, private job creation came in at 342,000, beating expectations of a 189,000-job print. Following the release, ADP stated that “Job creation remained robust in July, with leisure and hospitality again driving growth. One weakness was manufacturing, an interest rate-sensitive industry that shed jobs for the fifth straight month”. As such attention now turns to US labour market data tomorrow.

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