Anthony Rayner, multi-asset investor at Premier Miton, is more inclined to the latter view, saying if the markets’ view that rates will be cut is predicated on there being a downturn forcing policy makers hands, but he feels that inflation may stay higher than central banks want, and they will avoid raising rates.
Despite market expectations, both the European Central Bank and the US Federal Reserve have continued to raise rates.
His view is that central banks globally will have to keep putting rates up, as inflation is likely to persist at above the 2 per cent target rate.
Inflation in the US, UK and Eurozone still at more than twice the 2 per cent target level. Aliaga-Diaz notes that the persistent inflation in those areas now seems to be driven by the services sector rather than the goods sector, supply chain issues had driven goods shortages and that contributed to the first wave of inflation.
Much of the reasons for the stand-off is that investors believe central banks will stop raising rates if the recession Blitz is expecting happens, as inflation is likely to fall anyway.
But as many of those economic conditions receded, they were replaced, according to Aliaga-Diaz, by services sector inflation, the levels of which he believes tends to be a more reliable long-term indicator of the future normalised level of inflation than the headline rate at any one time.
Colin Finlayson, fixed income investment manager at Aegon, is another who believes that markets may be wrong to anticipate rate cuts from here, but he does believe a “pause” in rates is likely.
The reckoning
Gilles Moec, chief economist at Axa Investment Managers, believes the dominant consideration for investors is one outcome of the present US debt ceiling negotiations is likely that government spending has to be cut in order to make a deal happen, and such a reduction, which he believes could be quite sharp, would be expected to negatively impact the US growth rate for this year, and may also mean that monetary policy doesn’t need to be as tight as would have otherwise been the case.
Concerns around the impact of the debt ceiling negotiations have also been on the mind of Rupert Thompson, but he says that more generally, he prefers Asian equities right now because the economic outlook is more positive for the region, compared with the US.
Of the consequences of the debt ceiling negotiations, he says: “If there were a temporary default, equities would undoubtedly be hit. As for the dollar and US Treasuries, the impact is harder to judge but somewhat paradoxically, the ensuing flight to safe havens might well lead to a strengthening in the US currency and a fall in US yields.”
