I have been a strong supporter of Bank of England Governor Mark Carney and his forward guidance but he and his interest rate setting team are stretching patience to the limit. It looks as if Carney has realised, belatedly, that he shares decision making with eight other highly opinionated people.
Minutes of the monetary policy committee meeting held earlier this month claims it is “surprising” that financial markets regard an interest rate rise later this year as “low probability”. This comment, released this week after being held back for a fortnight since the meeting, is not just surprising but downright astonishing.
Carney’s initial forward guidance indicated that the first rise in rates would be delayed to 2016. It was fair enough to nudge that guidance forward, as Carney subsequently did in the light of falling unemployment, but there has been no real indication that the MPC was veering towards as early as this autumn.
If the markets were wrong, that was not the fault of the markets. It was the fault of the Bank of England for giving such poor guidance. Surely we could have had a clear indication over the past two weeks if the markets were so badly out, rather than waiting for the release of the minutes of the meeting.
Actions speak louder than words and so far not one of the nine members has switched sides to vote for a rate rise. It will probably take three or four months for a majority of five to dribble across the floor, which takes us to October at the earliest.
I still think that February is the most likely month, given that inflation and wage rises remain consistently low, but the message now is February at the latest rather than, as the markets thought, February at the earliest.
Rising interest rates are usually bad for stock markets but any increase will be so gradual that investors are likely to be swayed by the message that the economy is out of intensive care. That message has been reinforced across the Atlantic by the Federal Reserve cutting its monthly cash injections by another $10 billion despite downgradings of growth forecasts for the US.
Private investors have cottoned on and financial services provider Capita Asset Services calculates that £238.8 billion, the highest amount since the financial crisis, is held by individuals in UK shares. That is likely to increase further when the ISA entitlement goes up next month. I have already invested most of this year’s current entitlement. I’ll probably let markets settle if they shoot up in July but I’m looking for opportunities to invest the rest as soon as possible.
Shoppers’ Tastes Change
When retailers feel the squeeze, can suppliers be far behind? Premier Foods (PFD) saw its shares slide 10% after warning that sales were falling and that it was unlikely to hit its target of 2-3% growth for the full year.
The “power brands” such as Kipling cakes, Loyd Grossman sauces and Oxo cubes are not powering anywhere as supermarkets slash prices. That means either that Premier has to reduce its own prices or watch sales switch to cheaper own-brand lines.
Premier clings to its hope that despite the pressures it will maintain profits. When the best you can hope for is stagnation – and even that is a forlorn hope – it is hard to see any attraction in the heavily battered shares. There is no dividend for as far as the eye can see. Don’t even think of buying for recovery. It is not too late for shareholders to get out with as much dignity as they can.
Profit from the Housing Boom
In sharp contrast, house builders power on. Berkeley (BKG) reported profits up 40% in the 12 months to the end of April on revenue up 18%. It built more homes than at the height of the property boom in 2007.
Berkeley has benefited from building mainly in London but with house price rises rippling outwards the market almost everywhere in the UK is thriving. Interest rate rises will be slow in feeding though. Although shares in the housing sector are already factoring in a lot of good news, stay invested.
