Michael Saunders: One more UK interest rate hike likely in May
Michael Saunders, a former policymaker at the Bank of England, predicts inflation will force one more increase in UK interest rates, next month.
Saunders told Radio 4’s Today Programme that the surge in energy prices was the overwhelming factor driving up inflation, pushing up household bills, business costs, and food production prices.
But Saunders hopes that we are “now, just about, finally at the turning point”, and that inflation will fall “pretty sharply” over the rest of this year.
The BoE’s target is to keep inflation at 2% in the medium term.
Saunders predicts the Bank’s monetary policy committee will vote to raise interest rates in May, for the 12th time in a row, from 4.25% to 4.5%. But that could be a “final hike”, he predicts, followed by a long period where interest rates are fairly stable.
He says:
I think they’re probably almost done now….
The big tightening cycle, of interest rates going up meeting after meeting, I think that’s largely over.
The money markets, though, show investors predict rates could rise to almost 5% by the end of this year.
Key events
Yellen to call for ‘constructive and fair’ economic relationship with China
US Treasury secretary Janet Yellen is expected to call for a “constructive and fair” economic relationship between China and the US.
In a sign that Washington wants to strengthen ties with Beijing, Yellen is expected to say later today that the US wants to cooperate with China on global issues such as climate change, debt relief and macroeconomic stability.
But Yellen will also warn that US will keep resisting “unfair” economic policies, amid ongoing tensions between the world’s two largest economies.
She is expected to tell Johns Hopkins University’s School of Advanced International Studies that:
“More than resources or geography, our country’s success can be attributed to our people, values and institutions. American democracy, while not perfect, protects the free exchange of ideas and rule of law that is at the bedrock of sustainable growth.”
Afternoon summary
Time for a recap – here are today’s main stories so far:
U.S. existing home sales fell by 2.4% in March, new figures show.
Existing home sales dropped to a seasonally adjusted annual rate of 4.44 million units last month, the National Association of Realtors reports, as rising mortgage rates deterred potential buyers.
“Sales of existing homes dropped 2.4% from February’s downwardly-revised 4.55 million annualized pace to 4.44 million. Sales were 22.0% lower than the same month last year. Noticeably, sales of homes across all price ranges dropped at double-digit rates.” @GeorgeRatiu pic.twitter.com/KG35KVGzno
— The KCM Crew (@KCMcrew) April 20, 2023
Seagate hit with $300m penalty for continuing relationship with Huawei
Hard drive maker Seagate has been hit with a $300m penalty for maintaining a business relationship with Chinese technology firm Huawei after the company was added to a U.S. trade blacklist.
Seagate reached an agreement with the U.S. Department of Commerce to resolve allegations that Seagate breached rules by selling millions of hard disk drives to Huawei between August 17, 2020 and September 29, 2021.
It’s the largest standalone penalty in the history of the Commerce Department’s export control bureau, according to CNBC.
Seagate says it settled after considering the risks and cost of protracted litigation involving the US government, as well as the size of the potential penalty.
Back in 2019, Donald Trump’s administration banned Huawei from buying US components without official approval. The export control rules were later amended to block all unlicensed shipments of chips and components to the company, even from non-US suppliers, if they included any American machinery or technology.
Dave Mosley, Seagate’s chief executive officer, says:
“Integrity is one of our core values, and we have a strong commitment to compliance as evidenced by our global team of international trade compliance and legal professionals – complemented by external experts and outside counsel.
While we believed we complied with all relevant export control laws at the time we made the hard disk drive sales at issue, we determined that engaging with BIS and settling this matter was the best course of action. We are now moving forward fully focused on executing our strong technology roadmap to support the growing demand for mass data storage solutions.”
Seagate hit with $300 million penalty for continuing $1 billion relationship with blacklisted firm Huawei, despite U.S. export controlshttps://t.co/KZP9LgsD4E
— CNBC (@CNBC) April 20, 2023
Wall Street has opened in the red, as shares are pulled down by economic worries, and jitters about the US debt ceiling.
The Dow Jones industrial average has dipped by 153 points, or 0.45%, to 33,743 points, while the broader S&P 500 index has lost 0.55%.
The increase in US jobless claims last week will be adding to concerns that the US could drop into recession.
Tesla’s shares have fallen 7% after missing Wall Street forecasts last night, as price cuts ate into its profit margins.
Investment bank Jefferies also believes the Bank of England is near to the end of its rate hiking cycle.
They expect the last hike to be in May, with rates peaking at 4.5% (up from 4.25% at present).
Jefferies say:
Market is currently pricing a peak just under 5%.
Recent inflation prints confirm our negative bias for inflation in the UK – it is likely to stay higher for longer than other economies. However, a slowing growth picture and the fact that mortgages are tied to the front end of the curve would constrain the BoE.
While most of this morning’s US macro talk is on initial jobless claims—which edged higher to 245,000, above the 240,000 consensus forecast— the data putting downward pressure on yields is from the Philly Fed pointing, albeit partially, to a softening #economy (prices and volume)
— Mohamed A. El-Erian (@elerianm) April 20, 2023
The US dollar has dipped on the foreign exchange markets.
The rise in jobless claims, and slowdown in Philadelphia manufacturing, may nudge the Federal Reserve towards ending its interest rate increases soon….
Disappointing Philly Fed manu index and jobless claims data denting dollar demand here. Early PM gains entirely reversed in DXY pic.twitter.com/YR6EEkQqQA
— Joshua Mahony (@JoshuaMahony) April 20, 2023
Manufacturing activity in and around Philadelphia continued to decline overall in April, at the fastest pace since early in the pandemic.
The latest Manufacturing Business Outlook Survey, compiled by the Philadelphia Federal Reserve, found that the prices charged, and paid, by factories in the district deglined again.
Firms’ expectations for growth over the next six months remain subdued, even though indexes for new orders and shipments rose.
This pulled the index for current general activity down by 8 points to -31.3 in April. That’s the eighth consecutive negative reading, and the lowest reading since May 2020
US jobless claims rise
The number of Americans filng new claims for unemployment support has risen again, to the highest in three weeks.
Last week, 245,000 initial claims for jobless support were filed across the US, an increase of 5,000 on the previous week.
Initial claims are a proxy for job losses, and this may suggest that US companies laid off more staff as rising interest rates – and last month’s banking crisis – cooled the economy,
Initial claims ticked up last wk to 245k from 240k. Continuing claims rose more significantly to 1.865m from 1.804m, rising to the highest level since Nov 2021.
Continuing claims continue their steady rise, now near pre-recession levels (defined here as the Feb ’20 avg) pic.twitter.com/FgItv1nPlT
— Daniel Zhao (@DanielBZhao) April 20, 2023
