SFG Morning Macro

A funny thing happened on the way to the Bank of England.

Given the fact that global equity markets shrugged off the .25bps raise in rates and that the delta between inflation and the near-term deposit rate in China is around 3% we have been looking at other interest rate triggers that might prick the current run up in asset prices.

This morning we say look no further than tomorrow morning and the Bank of England’s interest rate announcement.  With inflation in the UK running at 3.7% during last month’s read, we believe that the end of the liquidity rally will begin in London. 

We expect at .25bps rate hike in UK near term lending rates effective tomorrow.

While we don’t expect Uncle Ben to react (he never has on the upside) we do believe that markets will.

We are tiring of the talking heads telling us that the back up in yields has to do with inflation. In fact we think it’s the market trying to move the needle on Bernanke.  We believe that the market now has serious concerns about run away asset prices (outside homes and unit labour costs) that could seriously affect the gravy train from the emerging markets.

It is important to remember that the current US Federal Reserve Board of Governors and its Chairman are ostensibly a very similar group of people who brought you two other liquidity fuelled bubbles over the past 15 years.  Are we really to believe that loose monetary policy influences hiring? 

The facts are that loose monetary policy hasn’t helped hiring in over 30 years.  The 1991 recession was the beginning of the “jobless recoveries” that marked the developed economy’s deal with the emerging economies to shift production out of the US, thus ensuring the hollowing out of skilled labour in America. 

We had the chance to pay the piper then and we didn’t.  We’ve been in denial for nearly a quarter century.  Our continual mantra of “this time is different” will not hold.

“What We Are Expecting”

  • Grains trade higher today on reduced carry outs
  • Emerging Markets get crushed in the next week
  • BOE raises rates tomorrow

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