Federal Reserve holds rates
The Federal Reserve did not increase US interest rates last week, as expected. However, the committee also aligned its outlook with fixed income markets, indicating that it was likely not to increase interest rates for the rest of the year, for the first time since 2014. Furthermore, they intend to halt the quantitative tightening programme in September. The release was followed by movement in the fixed income market that spooked investors towards the end of the week. The closely watched US yield curve inverted, with a three-month treasury yielding more than the 10-year. This indicates that the market is anticipating rate cuts in the medium term and signals weaker economic growth and potentially a recession. While yield curve inversions have preceded recessions throughout history, not all yield curve inversions have led to recessions. Investors, therefore, need to take into account a wider range of data.
Following the latest round of Parliamentary votes and facing further defeats, Theresa May travelled to Brussels to agree on an extension to Article 50, pushing out the leave date from 29th March. This was granted by the EU although the longer extension was given on the condition that the Withdrawal Deal was passed. Ultimately, while the dates have been moved, there is little more clarity on what the final outcome will be, as few MPs have changed their voting intentions. The Prime Minister’s situation is now looking increasingly tenuous, and it is likely that Parliament will begin to take more control. Expectations that there will be a leadership change or potentially a general election are on the rise.
Strong UK Jobs Data
The Office for National Statistics released data last week showing that the UK economy added 222,000 jobs in the three months to January 2019. As a result, total employment reached another record high of 32.71 million. The unemployment rate also dropped to a historic low of 3.9%, the lowest rate since the mid-1970s. The demand for labour and tightening market conditions continued to drive wage growth, with average weekly earnings rising by 3.4% year on year. Higher wages and lower inflation will be positive for workers, who are now seeing a prolonged period of real earnings growth. However, it is important that wage growth is driven by increases in productivity for this trend to continue in the long term. Wage growth without a corresponding increase in productivity is likely to lead to higher inflation and will be met with higher interest rates.
|UK 10 Year Gilt Yield