31 May 2023
Only a few days ago, the UK economy was heading for calmer waters, with interest rates supposedly peaked and inflation on the way down. While this potential switch from recovery mode to a more steady long-term growth cycle will have attracted the attention of day traders, recent events will have many licking their lips in anticipation. So what has happened?
The headlines confirm what the Bank of England had hoped, inflation is on the way down, falling to 8.7% in April compared to 10.1% in March. However, with analysts forecasting a rate of 8.2%, the headline rate did not fall as far as many had expected. There was also one more surprise!
The core rate of inflation, which strips out volatile food and energy costs, actually increased between March and April, rising from 6.2% up to 6.8%. This has created a day trader's dream, volatility, uncertainty and markets currently on a knife edge. This came only days after the IMF issued a statement, in line with the Bank of England’s thoughts, that the UK would not suffer a recession in 2023.
The conflicting opinions on the short to medium-term outlook for inflation and, consequently, the UK economy have caused significant uncertainty. We now have leading city experts suggesting that the UK will fall into recession towards the end of 2023 or the beginning of 2024. Those day traders able to take both long and short positions will be rubbing their hands in anticipation. An increase in interest rates will significantly impact business and personal finances!
While the Bank of England has yet to give an updated opinion, the bond markets are suggesting that UK interest rates could rise to as high as 5.5% by the end of 2023. This will significantly impact mortgage rates and see the UK government pay more to finance debt. This will also lead to significant reductions in spending on public services and a lack of flexibility regarding short term budget tax giveaways.
It will be fascinating to see how the UK stock market responds to increasing uncertainty regarding interest rates and inflation. The consensus is that UK markets tend to look nine months in advance, which, according to some of the more downbeat expectations, would place the UK in the midst of a recession. Albeit, likely to be relatively short-lived and a shallow downturn.
Day traders looking to trade in short-term volatility will be waiting to benefit from new concerns regarding the Bank of England's current standard of economic forecasting. We know that the Bank of England was behind the curve when inflation took off and now, admittedly in line with other leading experts, appears to have underestimated the core strength of inflation.
It is not very often that the money markets are wrong regarding the short to medium-term direction of interest rates. Therefore, the recent hike in expectations should not be discounted. Whether the likes of the Bank of England and the IMF update their current expectations remains to be seen. In the short to medium-term, we can expect to see a degree of volatility, playing into the hands of day traders, with many investors likely to take less notice of the Bank of England’s future updates.
The Bank of England and other leading economic experts were adamant that inflation would fall sharply in the latter half of 2023. However, the fact that core inflation increased from 6.2% to 6.8%, a 31-year high, has made many people sit back and reconsider their positions. Volatility and uncertainty, a day traders dream!
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