December 18, 2023

Powell’s promised punch bowl is good enough for now

Macro & Overnight

Following the party mood induced by Jay Powell last week, talking about lower rates in 2024, there has, over recent days, been a rearguard action from central bankers to try to remove the punch bowl.

Ironically, ECB President Lagarde, who should think about lowering rates more than the Fed, claimed she hadn’t even considered it.

The Bank of England just cut and pasted the language from previous announcements that the battle against inflation is not over, and rates will be higher for longer.

The BoE’s reluctance to join Powell’s party may be at least partly because we get UK inflation data on Wednesday, where the headline will be for a further modest decline in the headline rate to circa 4.3%, but with an increase in the underlying core measures.

Such is the reflexive nature of markets that the mere hint of lower rates next year makes lowering policy rates less necessary, in what former Bank Governor Mervyn King described as the Maradonna effect. Just as England’s defence assumed the great player would shimmy around them, allowing him a straight path from the halfway line to score “that goal,” so too might central bankers decide that bond market investors have eased financial conditions sufficiently to make lowering rates early next year unnecessary.

However, such is the nature of relief rallies that it will take more than this to stop the Santa rally into the year-end.

UK Company News

Games Workshop has updated investors on its negotiations with Amazon over exclusive use of its Warhammer IP for films and TV productions. This will undoubtedly be welcome news for Games Workshop’s legion of loyal private shareholders. 

Professional services company RBG has warned that its Legal Services division has not seen its typical H2 seasonal strength. It saw lower activity in Commercial Real Estate and Equity Capital Markets, with transactions delayed into 2024 or cancelled altogether. Its corporate advisory division, Convex Capital, reports transactions taking significantly longer. Although revenue for FY 2023 will be only slightly lower than expectations, EBITDA will be sharply lower at £4m versus last year’s £15.8m due to one-off costs and write-offs.  

The restructuring and right-sizing of RBG involves more significant challenges than first thought. Although HSBC renewed its lending terms last week, slower markets in commercial property, capital markets, and private company M&A are impacting it hard. The company has surplus assets, including office space and litigation assets left over after the Lionfish disposal, but it remains debt-encumbered. Lower rates and revitalised financial market activity can’t come soon enough.  

Prognosticator   

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