The FTSE 100 index fell by 0.4% on September 13 - the day when the Bank of England (BOE) met and announced no change in monetary policy settings, keeping the bank rate at 0.75% (after the 25bps lift in August).
While the BOE's move was widely expected, the bank's forward guidance warned that:
"An ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon."
No problem. The FTSE 100 index pretty soon got over that, rallying by as much as 3.2% from that day through to September 27, perhaps taking solace in the BOE's message that forward interest rate hikes would be "at a gradual pace and to a limited extent."
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Cyclical Outlook: Growing, But Slowing
However, the recent sell-off in the US bond market has hit the FTSE 100 harder than its counterparts, dropping by 1.2%. This compares with losses of: 0.9% for the S&P 500; 1.1% for the Euro Stoxx 50 and 0.6% for the Nikkei 225.
This could be because the jump in US bond yields would hasten the BOE's rate hikes. Not least because of bank's optimistic observation on the domestic economy:
"UK GDP grew by 0.4% in 2018 Q2 and by 0.6% in the three months to July. The UK labour market has continued to tighten, with the unemployment rate falling to 4.0% and the number of vacancies rising further."
True that. The unemployment rate has remained at a 43-year low of 4% in the three months to July. This is starting to impact on wages. The annual growth rate in UK average weekly earnings (excluding bonuses) accelerated to 2.9% in July from 2.7% in the previous month and appears to be re-energising inflation.
UK headline inflation quickened for the fourth straight month to 2.7% in July from 2.5% in June while core inflation jumped to 2.1% from 1.8%.
Without Brexit uncertainty and concerns over the US-China trade spat, no one could fault the BOE if it raised rates again sooner than expected.