Morning Minutes

Bank of England’s Welcome to the World of Stagflation




Stagflation, a period of high inflation and low economic growth, has stormed back into the public eye in a meaningful way for the first time since the early 1980s in recent months. This morning, investors received a major indication of what stagflation means for monetary policy from the Bank of England this morning.

As part of the commentary accompanying its interest rate decision, the UK’s central bank forecast that “UK GDP growth is expected to slow sharply”. For the last forty years this would have been as a dovish signal that monetary easing could be on the way. Not this time. The Bank of England raised its benchmark rate by 0.25% to 1.00% and in the 6-3 MPC vote, the dissenters were calling for a 0.50% hike like the Fed did yesterday. Why the continued hawkishness? Also in the statement, the Bank indicated that it thinks the UK inflation rate could hit 10% this year up from the 7% rate reported for March.

The combination of a gloomy economic forecast and hawkish monetary policy stance sent the Pound plunging 1.7% against the US Dollar this morning. It also appears that a stampede into defensive havens has started in currencies with Gold rallying 1.6% and Silver soaring 2.7% while Bitcoin is down 0.7%.  

Meanwhile, it is increasingly looking like yesterday’s late day surge in the US may have been a bear market bounce. After raising interest rates introducing Quantitative Tightening as expected, Fed Chair Powell suggested the potential for additional 0.50% rate hikes at upcoming meetings but downplayed the potential for individual meeting increases of more than 0.50%. Traders took that news as a positive, erasing early losses and driving US indices to gains of 2.8%-3.2% on the day. Enthusiasm has quickly faded, however, as US index futures are down 0.4%-0.7% this morning suggesting that investors remain sternly divided between those who want to “buy the dip” and those who want to “sell the rally”.  

Crude oil contracts are up 1.2% today with WTI and Brent trading just below or above$110.00/bbl. OPEC+ has agreed to continue its production restoration plan of 400,000 bbl/d per month as was widely expected, despite outside pressure/demand for more production to offset Russian sanctions. The EU, for example, is reportedly still looking to ban Russian oil as part of sanctions related to the Ukraine war.

Several online retail stocks are getting smashed this morning after reporting disappointing earnings and/or guidance including Shopify ($0.20 vs street $0.64, down 13.0% premarket), Etsy, down 12.2% premarket on soft guidance, and Wayfair (-$1.96 vs street -$1.56, down 12.0% premarket). On the other hand, travel site Booking Holdings is up 9.6% premarket on a big earnings beat ($3.90 vs street $0.90).

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Colin Cieszynski, Chief Market Strategist

Colin Cieszynski, CFA, CMT
Chief Market Strategist
+1 (647) 282-4428

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