By Just when investors thought the peak in interest rates was almost upon them, they are facing the stark realisation there may still be a considerable way to go.
The FTSE 100 is down sharply in early trade, with all sectors in the red as the impact of further rate hikes hit UK focused companies and worries about global push down sentiment for multinationals.
Disappointment that the end of the hiking cycle in the US is so near but yet so far, rose after the chair of the Fed Jerome Powell gave testimony to Congress.
He stressed to lawmakers that nearly all key decision makers at the Federal Open Market Committee expect it will be appropriate to raise rates again by the end of the year.
Despite the drift lower this week, the S&P remains in a bull market, up by over 20% since October, but concerns about the path of monetary policy is taking off some of the shine.
Bank of England policymakers are feeling the heat, stuck on an uncomfortable platform with inflation staying hot and sticky, but conscious that they need to mind the gap of the lag effect of previous rate hikes.
The cumulative effect of the rapid tightening in monetary policy over the past year, hasn’t yet been felt by a big chunk of homeowners and businesses as they’ve not had to refinance their debt.
So, many wealthier consumers will have been propped up by savings built up during the pandemic, with money in accounts gaining in interest.
For them, big spending has been a post-pandemic habit hard to break, which is likely to be part of the reason why companies are still enjoying fatter margins, not yet beaten down by a bulk of cash strapped shoppers.
A fast train of realisation is set to hit that budgets are set for a big squeeze as refinancing costs escalate, and deadlines loom for a large span of borrowers.
The cost-of-living crisis hit lower income families hard first, whose spend bigger chunks of their income on essentials, but now we are arriving at a stop where many wealthier households will feel their budgets being sideswiped.
As they tighten belts amid May’s grim inflation reading, forward indicators are already flashing that a larger drop in inflation is incoming.
Core producer price inflation eased sharply in May to 0.5% from 4.2% indicating inflation is easing further up the supply chain.
These are prices that will be passed on at the factory gate and should make their way onto our shelves.
The prospect of recession again looming, given the mortgage shock, may dampen down pay demands and reduce the wage spiral risks.
This is why the Bank of England may not opt for a 0.5% hike later, although this cannot be ruled out given how hot May’s CPI number was.
Expectations of just how far rates will go have rolled back a little in the gilt market, with the 2-year gilt yield easing slightly, although still above 5%, levels not seen for 15 years.
Bank of England policymakers will have their eyes firmly focused on the gap now present before the impact of rate hikes hits but are still set to give immovable inflation multiple shoves to push it in the right direction.
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