Market Reactions to BoE and ECB Rate Decisions
The market was expecting most of what it got from the Bank of England yesterday in the form of a 0.25% hike in rates (indeed, the last time we had a back-to-back rate rises was in 2004 and that ended up as a hat trick of hikes). The news was accompanied by confirmation that the BoE will also be winding down the asset purchase programme, albeit passively and by not reinvesting maturing bonds, rather than actively selling the portfolio. By Andrew bailey’s own admission “we have no real experience on this front… we’re going to have to find our way”. The bank will be keen to start reigning this in but won’t want to suck liquidity out of the markets to such an extent that things go awry. In Mr Bailey’s view, they’re not likely to ever get to pre-financial crisis levels of balance sheet but it does need to be smaller than it is today. The slight curve ball thrown the markets way was the split between those on the MPC wanting a quarter percent rise and those who wanted to go further with half a percent; the vote was 5-4 in favour of 25bps but such a narrow split sent a hawkish tone through markets and sterling got a big lift for the proceeding couple of hours, before words from the ECB cut it back to size.
Christine Lagarde was up next and perhaps caught the market more by surprise as we were generally just expecting the European Central Bank to sit on their hands and use their ‘average inflation’ justification for once again doing nothing. They did do nothing, but in the press conference afterwards, Ms Lagarde said that they were ‘much closer to target’ because of January’s European inflation print of 5.1% and that she wouldn’t rule out raising rates in 2022. The ECB don’t publish the split between voting members on who wants to do what, but apparently there were a couple at the meeting that wanted them to raise straight away. The market expectation is that rates in Europe could move to minus 0.1 percent by the end of the year and to do that the ECB would also have to slow down its asset purchase programme to the point that it would stop being a net purchaser of assets, much like the Bank of England. The reaction in the market was significant, with Italian bonds hitting their highest levels since May 2020 as concern over the ECB stopping being the purchaser of first resort re-opened the sort of concerns that we’ve seen in years gone by of European government bonds having wildly divergent risk profiles based on the stark differences in attitudes towards fiscal prudence.
The reaction in equity markets to all of this news was far from great, with between one and two percent taken off most European indices and the FTSE playing out in similar fashion. The problem that the stock markets have with this news is that it is really signalling the end of huge amounts of cheap and easy money in the system and even though the reductions in asset purchases will be very slow and the balance sheets of central banks will remain incredibly large for years to come, it’s the direction of the flow that will have them worried. Add to this the changes in interest from stocks that promise profitability one day to stocks that deliver solid returns now and the market has a lot to get its head around.
Energy Price Caps
Yesterday, the long-awaited announcement on energy price caps confirmed that on 1st April the cap will be raised by 54% meaning that the average household can now expect to an energy bill of £1,971 a year – representing an increase of £693.
Subsequent to Ofgem’s announcement, the Chancellor outlined Government’s response to assist the 22 million households affected – the headline figure being the provision of £350 in support packages to most of these households – which will cost the treasury £9bn. The first of these measures involves state-backed loans being issued to energy firms that are then given back as a £200 rebate to households, which will subsequently repaid over time in £40 instalments. The second of these measures is a £150 council tax discount which will apply to the 80% of people listed in A to D bands.
Of course, one of the key tenets of the Treasury’s plan is the assumption that energy costs will fall back to a more manageable level – and thus allow for the rebate to be paid back in the £40 instalments. While UK natural gas prices did slip below 200 pence per them this week (owing to an increase in gas leaving Ukraine, mild weather forecasts and Storm Malik resulting in wind power generation reaching record levels), it is worth considering how susceptible prices are to future supply and demand side changes. For instance, increased tensions in Ukraine could lead to a significant reduction in supply while potentially forcing the Bundesnetzagentur (the German energy regulator), to disallow authorising Nord Stream 2. Furthermore, Germany’s continued retirement of nuclear energy plants and Russian exports heading east to Asia down the Power of Siberia line could lead to a fall in energy supply to the West. Meanwhile, the continued demand side shock of Asian economies decarbonising energy sources and switching to LNG could also hit prices in the UK. Hence, all eyes will be focused on the geopolitics of wholesale gas prices, as Ofgem consider the next price cap level for 31st September.
The No.10 machine lost four of its most senior members last night in a meteoric turn of events which represent yet another blow to the stability of Johnsons’ leadership. The resignations came in from the: Chief of Staff, Dan Rosenfield; Director of Communications, Jack Doyle; the Principal Private Secretary, Martin Reynolds; and Head of Policy and a long-standing confidant to the PM, Munira Mirza. The de-facto power in the decision making of the country that each of these people held is hard to be understated and for the PM, the gap that they leave will be a difficult one to fill in this time of crisis. Hence, one senior backbencher told the BBC that the resignations were not merely a nightmare, but a total meltdown.
The quartet of resignations do however come from two different concerts. While the first three of those above resigned in relation to the party-gate affair and its subsequent mismanagement, Munira Mirza resigned in disappointment that Johnson had not retracted his comments made to Sir Kier about his time as the DPP.
Many elected, as well as non-elected officials have also shown a lack of support in the PM and while there could be as many as 17 MP’s who have formally handed a letter of no confidence to the 1922 Committee, they are still way off the 54 needed to spark a vote of no confidence. Nevertheless, members of the PCP will be reflecting and digesting the developments last night will no doubt lead to some interesting headlines in the coming hours, days and weeks.
Meta Shares Crash 26.4%
Zuckerberg’s fortunes were subjected yesterday to the ultimate Zuckerpunch with shares in Meta falling 26.4%, representing a loss of $230bn (£169bn) – the greatest single day loss for a US firm. This comes after news emerged about the first ever fall in Facebook’s global active users where they citied pressure from social media giant, TikTok. The fall yesterday is estimated to have wiped off $31bn from Zuckerberg’s net worth. Investors will therefore be playing close attention to Meta’s reaction and their plans going forward to increase active membership as they compete with TikTok’s rise.
At 13:30 (GMT) all eyes will be focused on Non-Farms where the market is expecting around 150,000 new jobs for the US economy, representing a slight slowdown from last month’s print on 199,000. In addition to this at 10:00 we have retail sales out of the Eurozone where the market expects a print of 5.1% for December – again a slight slowdown from the previous month’s figure of 7.8% potentially reflecting the effects of Omicron and consumers calculating the rising cost of living.