28th March 2022
The Cambridge Weekly – 28 March 2022
Better news is not always good news
Another good week for global equities, but a poor one for global bonds. Of course, that hides some disparity in the subsections that make up both markets. In the broadest sense, the US Federal Reserve (Fed) said interest rates will have to be higher (which we read as “higher than the market’s expectations”) and US Treasury yields have risen rapidly as a result. That has driven down bond values, due to the inverse relationship between yield and bond value movements. Equity investors, on the other hand, have been welcoming the de-escalation of energy price movements, to a greater extent than they feel concerned about the negative valuation impact higher yields also have on equity prices. We discuss the follow-through to other central banks in the separate articles below.
Bank of England the only fan of Sunak’s spring budget?
Budget announcements are inherently political affairs. Even so, Rishi Sunak’s Spring Statement was a particularly political broadcast. The Chancellor talked up the 5p per litre cut to fuel duty with the fervour of a vegetable market stallholder (by contrast, Germany just slashed a litre of petrol by 30 cents), as he did with the rise in the National Insurance Contributions threshold. Reminding MPs of his avowed fiscal responsibility, he noted the fuel tax cut would last for only one year. But Sunak saved his most crowd pleasing (in terms of Tory MPs) announcement for last: the 1p cut to income tax, which will be brought in from 2024, timed to land just before the next General Election.
Central bank tightening: like the 1970s or the late 1940s?
Amid soaring global inflation, historical comparisons are increasingly used in commentary. Mentions of the 1970s are most common, with pundits pointing to immense supply-side shocks and dwindling growth prospects. ‘Stagflation’ – the unusual cocktail of rapidly rising prices and weak growth – has crossed the boundary from financial to popular news, prompted by the looming cost of living crisis. Comparison to an earlier episode – the post-war inflation of the 1940s – was also made by the FT last week. The economic disruption of the Second World War is indeed similar to the disruption caused by the pandemic, as is the ensuing boom in demand.