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MAC Monitor — July 24, 2023

Multi-Asset Class Risk Monitor Highlights | Week Ended July 21, 2023

  • UK government debt benefits from falling inflation
  • Lower interest-rate expectations weigh on pound
  • Portfolio risk falls as currency losses offset stock and bond gains

UK government debt benefits from falling inflation

Borrowing costs for the British government plummeted across all maturities in the week ending July 21, 2023, as annual consumer-price growth in the United Kingdom dropped below 8% for the first time since March 2022. More importantly, core inflation—excluding energy, food, alcoholic beverages, and tobacco—broke its recent streak of four consecutive monthly increases, falling from 7.1% to 6.9%. Both headline and core prices rose by just under 0.17% from May to June, which is the month-on-month growth rate consistent with an annual inflation of 2%.

The yield decline was most pronounced at the monetary policy-sensitive 2-year point, which fell by 25 basis points, while rate decreases averaged 0.13% for longer maturities.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated July 21, 2023) for further details.

Lower interest-rate expectations weigh on pound

The pound sterling lost 2% against the US dollar in the week ending July 21, 2023, as traders slashed their monetary-policy expectations in the wake of weaker-than-expected inflation data. The Bank of England is now projected to raise its base rate from its current level of 5% to a peak of 5.75% by the end of the year, with a 25-basis point hike expected at the next MPC meeting on August 3. This is a far cry from the potential high of 6.5% that was priced into short-term interest-rate futures only two weeks earlier.

The pound’s devaluation helped stem the recent weakening of the US dollar, which recovered 1.2% against a basket of its major trading partners.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated July 21, 2023) for further details.

Portfolio risk falls as currency losses offset stock and bond gains

The predicted short-term risk of Qontigo’s global multi-asset class model portfolio reverted from 11.2% to 9.7% as of Friday, July 21, 2023, as continuing gains in global stock and bond markets were offset by weaker foreign-exchange rates against the US dollar. As a result, non-USD denominated securities recorded bigger decreases in their risk contributions relative to their monetary weights than their respective American counterparts. That being said, correlations across all asset classes remained predominantly positive, leaving very limited opportunities for portfolio diversification.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated July 21, 2023) for further details.