Uncertainties abound. Not only the question of whether Summer is going to appear or whether Portugal is amber or green, but more importantly, will the UK Government hold to its plan to relax the remaining Covid related restrictions on June 21st in line with its roadmap. As of the time of writing, this decision seems to be on something of a knife edge, pitching the precautionary instincts of health officials against the desire of politicians to meet the expectations of a weary public.
Another battle is raging in financial markets. With an apparently blistering economic recovery underway both in the US and UK, central bankers are pushing the line that inflationary pressures are transitory in nature. A combination of higher oil prices and rises in regulated household energy bills saw the UK’s inflation rate jump to 1.5% in April from 0.7% in March. In a report to parliament’s Treasury Committee, Bank of England Governor Andrew Bailey argues that “These transitory developments should have few direct implications for inflation over the medium term”. His comments echoed those of Federal Reserve Chairman Jay Powell on the back of a much higher 4.2% print in the US Consumer Price Index.
Other investors and commentators are expressing concern at what they see as a groundswell of inflationary forces that might signal a return of more sustained price increases and arguably this “jaw-boning” on the part of central bankers is part of a playbook which has seen an explicit move on the part of the Federal Reserve’s policy framework to tolerate periods of higher inflation in recognition of past policy errors in choking off recovery with premature tightening.
Following the sell off in the gilt market earlier this year, long dated UK government bonds seem to be signalling a relatively neutral position with yields having reduced after threatening to break to the upside. Recent trading has been rangebound suggesting that fixed income investors are somewhat stuck between the inflation doves and hawks… Download full market update