Elston
  • WHO WE ARE
    • About
    • Contact
    • Events
    • Press
  • WHAT WE DO
    • Portfolio Solutions >
      • Our Portfolios
      • Custom Portfolios
      • Research Portfolios
    • Fund Solutions >
      • Our Funds
      • Custom Funds
    • Index Solutions >
      • Our indices
      • Custom Indices
    • SPECIALIST STRATEGIES >
      • Liquid Real Assets
      • UK Equity Income
      • Permanent Portfolio UK
      • All Weather Portfolio UK
      • Dynamic Risk Parity
      • Gold and Precious Metals
      • Enabling Net Zero
    • Research >
      • Investment Research
      • Regulatory Research
    • CPD
  • WHO WE HELP
    • Financial Advisers
    • Discretionary Managers
    • Asset Managers
    • Asset Owners
    • 中文
  • Insights

Insights.

UK inflation and rates tightening

16/12/2021

0 Comments

 
Picture

 [7 min read, open as pdf]
  • US Fed signalled tightening, but markets expectations were ready
  • UK inflation hits 11 year high and could remain at ~5% through 2022
  • Bank of England raises rates +15bp to 0.25% to avoid “inaction”

Fed signals tightening
Fed Chairman Jerome Powell signalled that inflation is now the biggest risk to growth, and getting the labour market back to pre-pandemic levels.

The US will accelerate “tapering” or reduction of supportive asset purchases, and set out the potential for rate hikes in coming years (although no change in long-term target rate).

And despite rate hikes usually spooking markets, markets rallied: why? Because the bigger concern was that the Fed was behind the curve and not getting on top of inflation.  The risk of a so-called “policy error” had investors concerned. 

The fact that market-implied policy rates did not change before and after the policy announcement, suggests that this was a case of the Fed catching up with the market, than the market catching up with the Fed.

UK inflation
Meanwhile, UK inflation pressure continues, with November inflation data coming in at +5.1%yy, ahead of +4.8%yy forecast, the fastest rate in a decade.  Transport, clothing and food were the main contributors.

The risk is that inflation creeps into wage growth which would make it harder to bring inflation down to long-term target of 2.0%.  This is the second month in a row of an upside surprise.  The figure is also at the upper end of scenarios envisaged by the Bank of England at the November MPC meeting.

Bank of England raises rates
The Bank of England today announced a +0.15% increase in the Bank Rate from 0.10% to 0.25% citing “more persistent” inflation, and following the Fed’s lead in a greater level of tightening.

Furthermore, the Bank of England minutes suggest that inflation could remain at elevated levels and “expect inflation to remain around 5% through the majority of the winter period, and to peak at around 6% in April 2022”

Markets are pricing a 80% chance of a further +0.25% to 0.50% in February 2022.  In October, BoE Governor, Andrew Bailey guided that rates would need to rise to address inflation.

Where are breakeven rates?
The UK 5 year breakeven rate is at 4.38%, following the announcement, compared to 4.66% at the end of last week.  The US 5 year breakeven rate is at 2.73% today from 2.80% at the end of last week.

Liquid Real Assets performance
Our Liquid Real Assets Index combines exposure to higher risk-return real assets for inflation protection and lower risk-return rate-sensitive assets for interest rate hike protection for an overall volatility that is comparable to UK bonds.  By incorporating allocations to exposures that are driving inflation, such as Commodities, or can pass-through inflation, such as Property and Infrastructure, the real assets index can provide a return premium in excess of inflation and in excess of nominal bonds.

Summary
Inflation is proving persistent, policy makers are catching up to keep it in check.  Nominal bonds will remain under pressure, particularly longer-duration in a rising inflation, rising interest rate environment.
We advocate pairing equity allocations with diversified real asset exposure that can respond to inflation and floating rate notes that can respond to interest rate hikes.

Read full article with charts as pdf
Register for our Quarterly Investment Outlook on 26 January 2022

0 Comments



Leave a Reply.

    ELSTON RESEARCH

    insights inform solutions

    Get our weekly newsletter

    Categories

    All
    All Weather Portfolio
    Alternative Assets
    Alternative Strategies
    Bonds
    Business Practice
    Equity Income
    Equity Sectors
    ESG
    ETFs
    Evidence-Based Investing
    Factor Investing
    Gold & Precious Metals
    Guide To Investing
    Index Investing
    Inflation
    Macro
    MULTI ASSET
    Multi Asset Income
    Net Zero
    Permanent Portfolio
    Portfolio Construction
    Private Markets
    Real Assets
    Retirement Investing
    Risk Parity
    Value Factor

    Archives

    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    September 2019
    June 2019
    April 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    July 2017
    May 2017
    March 2017
    February 2017
    January 2017
    November 2016
    October 2016
    September 2016
    July 2016
    June 2016
    May 2016
    February 2016
    January 2016

    RSS Feed

Company

Home
About
Terms of Use
​​​Contact
​
​Events
​
Press

Solutions

​​Insights
​​​Research Service
​Research Library
Portfolio Analytics
​Our Portfolios
Custom Portfolios
​Retirement Portfolio
Our Funds
Custom Funds
​Retirement Funds
Our Indices
​Custom Indices
Retirement Indices

Services

CIRP Development
Regulatory Research
​
​​CPD

By client type:
For Advisers
For Discretionary Managers
​For Asset Managers
For Asset Owners


© COPYRIGHT 2012-21. ALL RIGHTS RESERVED.
  • WHO WE ARE
    • About
    • Contact
    • Events
    • Press
  • WHAT WE DO
    • Portfolio Solutions >
      • Our Portfolios
      • Custom Portfolios
      • Research Portfolios
    • Fund Solutions >
      • Our Funds
      • Custom Funds
    • Index Solutions >
      • Our indices
      • Custom Indices
    • SPECIALIST STRATEGIES >
      • Liquid Real Assets
      • UK Equity Income
      • Permanent Portfolio UK
      • All Weather Portfolio UK
      • Dynamic Risk Parity
      • Gold and Precious Metals
      • Enabling Net Zero
    • Research >
      • Investment Research
      • Regulatory Research
    • CPD
  • WHO WE HELP
    • Financial Advisers
    • Discretionary Managers
    • Asset Managers
    • Asset Owners
    • 中文
  • Insights