After the relief for bond markets in January as longer-term yields fell back despite the latest round of base rate increases, February saw a sharp reversal.

The US ten-year yield jumped from 3.5% to 4%, with a similar 50bp jump in UK yields taking the ten-year Gilt to 3.8%.  Of course, this led to steep falls for Gilt prices, which are now down for the year.  Possibly the most dramatic was the jump in Eurozone yields where the German ten-year Bund hit yield levels not seen since 2011, negative rates now being consigned to a historical oddity.

The change in mood followed better economic data with subsequent warnings of more to come from central bankers.  Here is Jerome Powell, Chairman of the US Federal Reserve, at yesterday’s testimony to the Senate Banking Committee:

"The data from January ... have partly reversed the softening trends that we had seen ... just a month ago ... the breadth of the reversal along with revisions to the previous quarter suggests that inflationary pressures are running higher than expected at the time of our previous [FOMC] meeting."

"The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated ...If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes."

Chairman Powell continues to stress that they will be guided by the “totality” of the data as it emerges.  Next up being the US employment figures due on Friday, which are likely to set the tone for the next few weeks, along with inflation figures the following week.  Expectations for the peak levels to be reached by central banks have been ratcheted up again with a 50bp increase from the Federal Reserve later this month now anticipated (to 5.25%).  The Bank of England also meets later in the month and expectations have also been raised for their next move, we expect a 25bp increase to 4.25%.

Most equity markets sold-off as the mood soured in the bond markets, but the UK held on to modest gains (it does look quite compelling in an international context and seriously shunned…) and a mooted Middle Eastern bid for Standard Chartered contributed.  Consumer staples out-performed as usual in nervous markets, notably L’Oréal, Unilever, Walmart; oil stocks jumped again after good figures and despite a weakening oil price.  In contrast, mining stocks had a poor month, notably Anglo American, Barrick Gold and Newmont with a falling gold price and concerns that the Chinese recovery might disappoint.

We don’t think that much has changed with our four key questions/concerns for the year:

  • Have we seen the worst of inflation? 
  • How far will the Federal Reserve (and the other CBs) go? 
  • Will the recession be worse than currently expected? 
  • Is there an endgame in Ukraine or does it get worse?

Despite the noise, we still expect to see lower inflation as the year unfolds with a shallow recession the most likely.  But we do expect the swings in sentiment to be repeated over coming months with markets in thrall to the employment, inflation and other economic releases.  Stick with (shorter-dated) sterling corporate fixed interest and take a fresh look at the UK equity market! 

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

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