Rising inflation is no longer the primary adversary in the current economy.
Investors have shifted their concerns to a new economic challenge, slowing economic growth. The S&P 500 has exhibited a pattern of ebbs and flows throughout 2022, however, the overall trendline has been substantially negative. In a normal market environment, stocks and bonds move in opposite directions, as investors will flee a declining equity market to safe and stable fixed-income instruments. However, given an interest rate environment like that of the early 1980s, stocks and bonds are showing a positive correlation. Internal models show the correlation between the S&P 500 and the Bloomberg US Agg Total Return Index sits at 0.66 as of November 30, 2022. For context, the highest correlation figure throughout the Global Financial Crisis was 0.44. According to the Wall Street Journal, Treasury notes with longer maturities have garnered more gains than shorter-term notes, indicating that traders believe the Fed will continue to push rates even higher before easing up to not trigger a recession. Similarly, ten-year yields have dropped more than two-year yields, therefore worsening the already inverted yield curve which can be a prominent indicator of a looming recession. Although inflation is still high at 7.3% year-over-year in November (down from 7.7% year-over-year in October), it is showing signs of cooling. The Fed’s already year-long battle with inflation is far from over, however investors are now shifting their concerns that the Fed’s course of action might be detrimental to overall economic growth. Investors need to remember that the terminal rate is the main priority, not necessarily the speed at which it is achieved. That said, the astonishing pace at which rates are climbing could bring the U.S. to a point of stagflation which could then bring on a recession sooner rather than later. Fed Chair Jerome Powell is cognizant of the dilemma ahead and has reiterated he doesn’t want to over-tighten policy, illustrated by the expected 50 bps hike later this week.
Proposed looser U.K. banking regulations to spur growth and banking efficiency.
On Friday, the Chancellor of the Exchequer proposed an over-30-point package to reform and ease regulatory rules on banks, insurers, and investors in an effort to cement London as an attractive global financial hub and to promote investment and growth across the U.K. This is the U.K.’s first major effort to design its own regulations since its withdrawal from the European Union. The proposals outlined in the “Edinburgh Reforms” include amending or repealing some of the regulations that were introduced in the wake of the 2008 Global Financial Crisis which were designed to protect savers and taxpayers. The U.K. government intends for the Edinburgh Reforms to strike a balance between maintaining strong regulation to provide security against the events that led to the global financial crisis while establishing a more agile and competitive regulatory framework that remains attractive to global participants. While the looser regulations could result in U.K. banks seeing some cost savings efficiencies, it will remain prudent to monitor their business activities, risk profiles, and longer-term implications from the regulatory revisions.
