Cambridge Weekly Update – 7th May 2019

Central banks disappoint expectations
Last week we wrote that stock markets faced being challenged by the decline of a number of stimulating aspects that had been regularly named as the drivers of the 2019 recovery. The most crucial one being central banks’ assurances that they would refrain from further monetary tightening and might even consider renewed rate cuts.

An early view on April PMIs
We keep an eye on data releases on a weekly basis at Cambridge, one of the more important ones being the PMIs which gauge if things are improving or deteriorating in terms of new orders, employment, output and various other factors. This is distilled into a single number which oscillates around 50 (over 50 = getting better, below 50 = getting worse). As we’ve discussed in these pages before, we are positioned for a moderate improvement in economic data relative to the gloomy expectations which gripped the markets through the turn of the year.

The UK’s inflation conundrum
The Bank of England is one of a few global central banks that has steadfastly maintained its message that interest rates are set to rise, slowly. This is against a backdrop of other central banks ending their tightening bias as global growth weakened in 2018. An example of this is the US Federal Reserve who noted in this week’s FOMC statement that core inflation is now “below 2%”, and therefore the Fed “will be patient” regarding any further interest rate moves.

The demise of LIBOR signals further loss of bank influence
In the US and the UK, the interbank lending system is declining. The associated reference rates, in particular the London Interbank Offered Rate, are set to disappear.

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