After a big build up, the week came to something of a disappointing end for some. While it was a fantastic event, Roger Federer’s last professional career match ended in defeat for him.
Okay, it wasn’t just him, there was one Rafael Nadal involved too for Team Europe, as well as the victorious opponents Jack Sock and Frances Tiafoe, both from the US representing an altogether younger Team World. But Fed didn’t seem to mind too much; he’s held by many as the greatest of all time but, as he put it, he was just allowed by his mum and his wife to play tennis with his friends for as long as he wanted to. I said to my 17-year-old son, who is mainly responsible for my interest in the game, the clock is ticking and you have just 24 years left…
There were a few notable non-sporting events last week worth mentioning; the announcements of policy rate decisions by the other Fed (US Federal Reserve) and the Bank of England and the UK government’s not somewhat mis-named 'mini-budget' announcement. Where do I start in thinking whether this budget was good or bad; and not from the perspective of how much extra money it might leave me and what I might do (or not do) with it, but from whether it actually promotes growth in the UK economy. It’s tempting to start by comparing it with other 'bad budgets', such as that of 1972 or even 1985, and for that comparison to be simply on the basis of tax-cutting focus or apparent trickle-down economics basis. But what really stood out for me was, given that the budget is headlined as being all about growth, and on the basis that growth must, in an advanced society, be intertwined with inclusion and sustainability, there was no mention of spending on education and training that would help to solve the long-standing productivity conundrum in an inclusive and sustainable way.
Yields up, sterling down
On Friday, the market moves were quite notably momentous – following the Fed decision on Wednesday to raise by 75bps, the Bank of England’s decision on Thursday to raise by (only) 50bps and the UK chancellor’s run-through of the mini-budget on Friday morning. Over the course of Friday, the benchmark five-year maturity gilt rose by 51bps in yield, giving a one-day return of -2.3% and a return over the week of -4.3%, which is a lot from a short-maturity government bond issued by a member of the G7. Even by the end of the chancellor’s statement itself, the size of the next planned rate hike by the Bank of England, as priced by the market, had moved from 75bps to 100bps. I have to say that was bothersome to me at the time as I was then faced with explaining to a client, in a call scheduled for immediately following the statement, why the charts of interest rate expectations were now meaningfully out of date even though they had only been drawn earlier in the morning.
In fact, the whole UK yield curve took a meaningful step higher on the day, by 50bps at the short end and 25bps from around 10 years onwards, essentially signalling a combination of views that inflation is not going away soon, rates will need to rise further to deal with it, and investors will only be willing to invest in gilts in return for more compensation for the risk that they will be taking on. Gilts, like other government bonds, are not entirely risk-free and their probability of default is rising; the probability of default as indicated by the five-year sovereign credit default swap market has increased almost four-fold since the beginning of this year and, while low compared with non-government markets, is higher than that of any of the G7 apart from Italy. Sterling investment grade credit reacted only marginally and negatively non-uniformly to the mini-budget and was only 1bps wider over the week at 161bps.
The currency markets clearly didn’t like the sound of the mini-budget announcements either, with the USD/GBP rate falling to a new post-1985 low below $1.09, and many market participants and observers suggesting no reason for the sterling to not test the 1985 low of $1.05. The pinch of salt required with the currency move, however, is general US dollar strength, including versus the euro. Fittingly, as I write this, Frances Tiafoe of the US just defeated Stefanos Tsitsipas of Greece to win the Laver Cup for Team World versus Team Europe.
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