UBS On-Air: Market Moves Client Strategy Office

The Bank of England offers some excitement as investors await the start of the UK interest rate easing cycle. That start is probably not today, but should be soon. The BoE relishes dissent and discussion to help form higher quality decisions (the Federal Reserve might like to take note), making policy outcomes less predictable. With consumer price inflation down nine percentage points from the recent highs, the case for lowering real interest rates is strong—but the BoE might want a couple more data points before acting.

May UK inflation data was as expected across the multiple measures released today. Headline consumer price inflation was 2%. The decline in inflation has almost nothing to do with government policy, and not that much to do with the Bank of England—a lot of this is the natural slowing of temporary inflation drivers. Durable goods prices sank further into deflation.

Eurozone final May consumer price inflation is very unlikely to change from the initial report. At 2.6% y/y, the rate is above the ECB’s target, but rate cuts are still justified. Inflation has fallen eight percentage points from its high. The impact of that on real interest rates is significant.

This week Jason ‘connects the dots’ to make sense of market performance, this in the wake of last week’s inflation data, along with the outcome of the June FOMC meeting. We also consider emerging geopolitical risks, and upcoming macro factors. Plus, share CIO’s current investment outlook and positioning recommendations. Featured is Jason Draho, Head of Asset Allocation Americas, UBS Chief Investment Office. Host: Daniel Cassidy

China’s May data dump showed weaker-than-expected industrial production, despite earlier reports of stronger exports. Domestic retail sales were stronger, slightly distorted by the timing of holidays. Restaurant sales were stronger, as people seem inclined to spend on having fun.

Yesterday’s US producer price inflation numbers added to a general sense of disinflation. However, the lower inflation reported in consumer and producer prices will not be fully experienced by consumers. The slowing fantasy price of owners’ equivalent rent does not affect real world spending power. Seasonal adjustments deliberately distort reality, and so disinflation here does not change consumers’ inflation experiences.