By Anna Peel. Originally published at ValueWalk.
“Relief has rippled through the financial markets as the Federal Reserve seems committed to keep to the path it had mapped out to try and tame roaring inflation. The FTSE 100 has opened 1.6% higher following big gains on Wall Street with the S&P 500 and tech heavy NASDAQ surging by around 3%.
Q1 2022 hedge fund letters, conferences and more
Relief On Financial Markets
Financial markets have become hooked on the drug of cheap money and policymakers are clearly keen not to induce a shock for the economy, by weaning dependents off too rapidly and that’s reassured investors. The 0.5% interest rate hike may have been the biggest in the US since 2000 but it was a move already priced in by the markets. Rolling back the mass stimulus programme by offloading bonds from Fed’s balance sheet will start on a more gradual incline than some feared at $47 billion a month, before rising.
Remarks by Jerome Powell soothed tensions further indicating a steeper 0.75% rise wasn’t on the cards right now for hikes in the summer, with a more gradual edging up of rates expected. But it’s not completely out of the game plan, as the Fed wants to stay nimble in the face of rapidly changing circumstances.
Now the focus switches to the Bank of England and its decision at midday and with the scene set of a determinedly cautious rather than an ultra-aggressive attitude towards reining in inflation, there is expectation policymakers will also vote for a rate rise of 0.25%. Companies and consumers are already braced for further rate rises which run the risk of making the cost of living and business more expensive. The toxic combination of high commodity costs, supply chain issues and the fight for labour is already weighing on demand, and the worry is that if rates rise too rapidly it could tip the economy into a downturn. This is why a softly-softly approach is expected from the Bank of England especially when it comes to the further unwinding of its mass stimulus programme. It’s already said it won’t reinvest profits of those bond purchases but getting the timing right to sell start selling off its $847 billion of holdings without unsettling the bond markets and leading to a hike in government borrowing costs won’t be easy.
Barratt’s Customers Shrug Off Rising Inflation
For now borrowers appear to be brushing off concerns about rising rates with credit card spending climbing and the housing market showing very little sign of losing steam. Barratt Developments PLC (LON:BDEV) has followed a string of house builders in releasing an upbeat picture of demand. Homebuyers for now are shrugging off worries about rocketing inflation and rising rates and are snapping up new homes like hot cakes. Forward sales including joint ventures hit £4.38 billion at the start of the month, compared with £3.7 billion a year earlier.
Sales are racing ahead, helped by the undersupply in the market and the march upwards of rents, making monthly mortgage payments cheaper. The reservation rate for homes increased 12% compared to the year previously as the race for space and hunger to get on the first rung of the housing ladder continues. Barratt is not immune to the pain of cost inflation afflicting the sector. It expects it to average at 6% for the year and could be particularly onerous over the coming months as suppliers are forced to fluctuate prices partly due to volatile energy costs. But it’s been able to hike the price of homes in response and for now its customers are willing to pay the price. With costs for consumers mounting across the board, homebuyers won’t be able to swallow rising prices indefinitely.”
Article by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown
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