by Qontigo
- Bank of England raises rates…and Gilt yields plummet
- Strong jobs report boosts the dollar
- Stronger stock-bond correlation raises portfolio risk
Bank of England raises rates…and Gilt yields plummet
British sovereign yields dropped to an 8-week low in the week ending February 3, 2023, as short-term interest-rate traders lowered their monetary-policy expectations for the remainder of the year. The Bank of England (BoE) raised its base rate by 50 basis points to 4% in line with market expectations on Thursday, but also moderated its outlook and rhetoric from a “greater persistence” of inflationary pressures that justified “a further forceful monetary policy response” to a projection that inflation will “fall to around 4% towards the end of this year.” Futures markets now price in one more 25-basis point rate hike in either May or June—down from an anticipated peak of 4.5%—with the possibility that the BoE may already start easing monetary conditions around the turn of the year.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated February 3, 2023) for further details.
Strong jobs report boosts the dollar
The US dollar gained 1% against a basket of major trading partners in the week ending February 3, 2023, following reports that the US economy added nearly three times more jobs in January than had been predicted by analysts. Non-farm payrolls rose by 517,000 last months, compared with a consensus forecast of 185,000 and 260,000 new positions in December. The report reignited concerns that the Federal Reserve could keep interest rates higher for longer, prompting traders to raise their year-end federal-funds predictions by more than 20 basis points to 4.7%.
The pound bore the brunt of the dollar strengthening, losing 2% against its American rival, as the projected year-end spread between the federal funds and BoE base rates widened from 43 to 85 basis points.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated February 3, 2023) for further details.
Stronger stock-bond correlation raises portfolio risk
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio rose slightly to 10.8% as of Friday, February 3, 2023, due to a more intense co-movement of equity and interest-rate returns. Non-USD government bonds experienced the biggest increase in their percentage risk contribution from 8% to nearly 10%, as European stock and bond prices were boosted by the prospect that inflation in the region may have peaked so that central banks may not have to tighten monetary conditions as aggressively as previously feared. Non-US equities, on the other hand, saw their share of total portfolio volatility fall from 19.7% to 17.5%, as local gains were dampened by exchange-rate losses against the US dollar.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated February 3, 2023) for further details.
