The rate remains unchanged, for now

July 20, 2016

After over seven years of unchanged interest rates the Bank of England surprised the markets, by leaving interest rates unchanged. Fixed interest markets had priced in an 80% chance of a 0.25% cut in the headline interest rate to 0.25%. A small number of economists also predicted a cut to 0%. However, the monetary policy committee has taken a more cautious route by adopting a wait and see approach. They want to ensure they have sufficient data on the state of the economy and direction of inflation before a decision is made. That being said both the committee and markets are predicting a cut at the next meeting in August, however, as always this will be data dependent.

Bank or England, rate

In the US the S&P 500 once again reached an all-time high, on Thursday. The index very nearly had a perfect week, although it faltered on Friday, falling 0.09%. Given the relative strength of the dollar, the uncertainty of Brexit and the upcoming US presidential election it is somewhat surprising that US equities have seen such strength. This is perhaps an indication that for the time being investor sentiment is more positive and willing to overlook negative news flow. Alternatively, the recent fall in Treasury yields will have been an additional driver of investors into equities, where dividends remain relatively attractive in comparison.

 

The turmoil in the UK commercial property fund sector somewhat abated last week as the £2.5bn Legal and General Property Fund elected to readjust its value upwards by 5% (following a previous 15% cut). While many funds have suspended trading, those which are open provide an important insight into the sentiment of the sector and investor flows. While prices are still below their pre-Brexit levels, this is potentially the first sign that investor sentiment is improving. However, these are short-term trends; the longer-term direction will take time to become clear.

 

Index Open Close Change % Change
FTSE 100 6590 6669 79 1.20%
S&P 500 2129 2161 32 1.50%
Dax 9629 10066 437 4.54%
Cac 40 4190 4372 182 4.34%
Nikkei 225 15106 16497 1391 9.21%
UK 10 Year Gilt Yield 0.73 0.804 0.074 10.14%

 

UK claimant count and retail sales today and Thursday respectively. All of these may provide an initial indication of the Brexit impact on the economy.