The Cambridge Weekly – 15th August 2022

Fear of missing out

Investors are feeling FOMO: the “fear of missing out” once again. Last week was a continuation of the trend from the start of July – which has seen a significant boost to both bond and equity markets. Curiously, the good feeling among investors seems unaffected by the bad news all around. Inflation is roaring ahead, and consumers are struggling to keep up, central banks are intent on crushing price pressures with aggressive monetary policy and talk of a global recession abounds. The growth slowdown is already being felt by companies. This year’s second quarter earnings showed a downgrade in forward-looking estimates for the next 12 months. And yet, stock markets continue to rally.

US inflation expectations

Behind the recent optimism in capital markets has been talk of the ‘peaks’: peak inflation and peak interest rates. How high will these peaks be, and when will they come? Stocks and bonds started to rally last month, and equities have continued in the growing belief that the US economy may have passed the inflation summit and is fast approaching an interest rate summit.

Fiscal firepower in UK’s inflation fight

Britain’s cost-of-living crisis has dominated the Conservative Party’s leadership election. The increasingly bitter race to replace Boris Johnson has seen a host of promises from candidates on taxes, energy bills and welfare payments. Rishi Sunak accused frontrunner Liz Truss of a U-turn on energy bills last week, after the former Foreign Secretary denied she had ruled out extra support. Sunak – the ‘tax now, cut later’ candidate – plans to give households increased emergency support payments if he finds himself in 10 Downing Street. Truss seemed to suggest her government’s support would only come through tax and National Insurance cuts, deriding “handouts” last Tuesday. A day later, Truss denied this meant she had ruled out additional support, while reiterating her preference for tax cuts.