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All eyes on US inflation

All eyes were on US inflation yesterday, which came out exactly in line with expectations and the same as it was last month…

This might seem like a non-event, but it will certainly be giving rise to some head scratching about just where prices are heading, as a year’s worth of rate hikes may have steadied the ship, but there’s still no firm sign that inflation is under control. The Fed’s plan to pause the current rate rise cycle is probably still the right one, but there will be a lot fewer people willing to call this the top of the hiking cycle. The pause is likely to mean the Fed won’t take any monetary policy action now until the autumn, with June and July’s meetings an opportunity to sit back and observe, whilst there is no meeting in August, means that September 20th is the next big date – though no doubt we’ll hear a lot from Fed members trying to keep markets well informed in the interim.

We heard a lot from Donald Trump last night on a 90-minute interview with his arch nemesis CNN! The interview brought back all sorts of memories of an openly combative era that we’d hoped had passed and was a clear reminder of what we might be returning to in 2025! The interview was pretty wide ranging, but a pertinent point to pick upon was The Donald’s take on the debt ceiling – “I say to the Republicans out there, congressmen, senators, if they don’t give you massive cuts, you’re gonna have to default”. His view is that a default is inevitable one day, so they might as well press hard for their demands in the knowledge that

Democrats will likely cave to them, but in any case, nobody knows how bad a default would be “it could be really bad, it could be maybe nothing, maybe it’s a bad week, or a bad day, who knows?” (But if it happens when you’re not in power, or even in opposition, what’s your personal downside?!). His words will serve to galvanise the Republicans that do want to take a firmer line on this and could mean that what we said at the beginning of the week wasn’t likely to amount to much, might amount to a lot.

On this side of the Pond

The UK government has rolled back the pledge to revoke all EU laws by the end of the year. The policy, which would have seen a legislative bonfire of 4,000 pieces of EU law has been watered down considerably, with plans now to identify 600 laws to be revoked. The sunset clause had been met with apprehension by businesses and concern from opposition benches that it would then allow ministers to replace laws as they saw fit, which may weaken regulation overall. The government’s take is that it is better to slow down the expiry and work through a process that allows meaningful reform, rather than rush it and focus on reducing legal risk. Not everyone is OK with it though; Jacob Rees-Mogg tweeted “regrettably the Prime Minister has shredded his own promise rather than EU laws”.

It’s the Bank of England’s turn to decide on interest rates today and expectations are for another 0.25% increase, taking us to 4.5%. The Bank’s most recent forecast sees inflation at the end of the year below 4%, but that is being contradicted by the NIESR, who think it will be at 5.4% by the end of 2023 and not back to the Bank of England’s 2% target until late ’25. A rate rise today is almost completely priced in and markets still expect more of the same until we get to, or above, a five percent base rate. As per the US’ conundrum, it may be that inflation remains stubbornly high for longer than expected, despite the recent fast falls in energy prices. As a guide, Rishi Sunak’s pledge to halve inflation in 2023 would mean getting the number at or below 4.5% by December.

In company news: Microsoft won’t be giving pay rises this year as it recognises that “navigating both a dynamic economic environment and a major platform shift requires us to make critical decisions in how we invest in our people, our business and our future”. The major platform shift being referred to is doubling down on AI and the economic uncertainties are clear to most – however, two weeks ago they did announce $53 billion in quarterly revenues and $18 billion of net income a couple of weeks ago, which led to a big jump in the share price, so we don’t imagine this will have gone down brilliantly with employees.

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