Provoking recession to deal with their mistakes is never going to be popular but it is plain that prolonging zero interest rate policies and pumping liquidity into the system for too long has far reaching consequences. Rate forecasts are continually revised and are proving to be of little value, higher for longer appears to be the most likely scenario although most curves have inverted as recession fears take hold.

The Federal Reserve did pause as anticipated but then followed up with some hawkish comments so we can look forward to several more 25bp hikes. They have managed to get US money markets to stop discounting rate cuts later this year but it took some plain language to do so. Now that the debt ceiling absurdity has been pushed down the road for another two years attention turns to their Treasury issuance plans which need to be substantial as the fiscal situation degrades amid limited spending cuts. Because of the scale of this issuance, it won’t just be in T-Bills but spread along the curve, let’s hope there are plenty of buyers.

The ECB hiked to 3.5% but remember that it was only last July that they ended 8 years of negative rates so when they can ease back on the rate hiking pedal is anyone’s guess. The Eurozone has seen inflation fall back quite quickly but has already experienced recession as a whole. It is possible that with the one size fits all nature of setting rates for the euro bloc means the time lag of the effects of these rate hikes is extended which risks the chance of the ECB over-tightening.

The UK remains the problem child in the G7 and public confidence in the Bank of England’s handling of the situation plumbs new depths. Employment numbers showed the labour market remains tight with the unemployment rate dropping to 3.8% and average earnings climbing to 7.2%. We then saw core inflation again hit a new high and CPI overall stuck at 8.7% meaning they had no choice but to hike 50 bp to 5% with more likely to come and although this level could be seen to be a historical norm that is no comfort to those geared in at the bottom.

Credit markets continue to be stable. New issuance is taken down well and the appetite for decent yielding corporate paper is unabated prompting some companies to access debt capital markets for the first time. Spreads overall continue to trade in a fairly narrow range.

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