Mr Bailey between a rock and a hard place

Wall Street shut on Monday and reopened on Tuesday following the leading global indexes lower. We noted on Friday that the S&P 500 appeared to run out of steam after a strong few weeks, and so it proved. Citi research noted that positioning in US equities extended as a result of the bullish run over the past few months. A pause was due as equity and bond markets await Powell’s semi-annual testimony to Congress. One would imagine he will stick to last weeks post meeting script and suggest the Fed’s work may be close to being done but not quite. That, unlike the investment community, he does not see rates falling before sometime next year.

Today we have the all-important monthly UK inflation data ahead of tomorrow’s Bank of England meeting. Mr Bailey is likely on tenterhooks as he will hope that the year-on-year rate comes in below the 8.4% forecast. The rate-setting committee and Mr Bailey will probably face difficult headlines whatever they do. Depending on the decision, they face the prospect of being accused of not taking decisive action to bring inflation under control or heap more pain on mortgage holders. Currently, the gilt market expects rates to peak over 5%, but expectations of when rates might fall significantly are a few years out from now. Recently there has been the opportunity to balance one’s portfolio with the more attractive shorter-term gilt yields, and it may soon be time to start thinking about locking in some of those more attractive yields slightly further out.

The relationship between the leaders of China and the US is not an easy one as neither trusts the other, but both know both economies need each other to thrive. Much of the world’s manufacturing base has moved to China, and China needs America to buy much of the goods produced. Over the past few weeks, leading US figures, Elon Musk and Jamie Dimon to name two of the most notable, have been to visit. Political tensions have risen post ballon-gate, and more recently, a Chinese fighter almost collided with a US service plane over the South China Sea. This week US Secretary of State Antony Blinken went on a state visit to China, where he met with Xi Jinping. The end result is unlikely to result in the two nations being best buddies, but the hope is that tensions may thaw as both economies look to recover.

I have attached a chart courtesy of the  Daily Shot to see how sentiment has changed for stocks. The searches for the term bull market. Only matched previously in early 2020.