June proved to be yet another brutal month for UK rates, The pressure for central banks to stay hawkish has been amplified as presented by the G4 at last week’s Sintra conference. UKs core inflation is stubbornly persisting and, in many ways, has acted as a warning to other central banks. Canada and Australia resumed their hiking pattern after their recent pause, and both Norway and the UK increased their pace of tightening policy by 50bps. Norway being the only other developed country, besides the UK, to be experiencing an increase in core inflation. Unexpected higher policy rates forced an unwinding of short end risk which resulted in losses across the market. The quarterly move in 2yr UK gilts was well in excess of 160bp. This has only occurred twice in the past 30yrs, namely in March 1994 and September 2022.
The rapid hiking cycle, seen over the last 15 months, has yet to fully impact the wider economy. Opposing this are the residual forces from excess savings during Covid lockdowns, and fiscal policy, have enabled the consumer to be more robust than previously assumed. The outlook, however, remains tentative as yield curves continue to invert significantly. Thereby expressing concern that inflation is sticky whilst also shortening the odds of a recession. This is not without reason, as data is increasingly showing tightening of credit conditions and softening in demand, yet the important lagging indicator of core inflation is generally decreasing at a frustratingly slow rate. The PAM G10 Macro portfolio is positioned to benefit from a weakening of the economy, which typically occurs in the last part of the business cycle.
The recent volatility has stretched the mean reverting trades in our portfolio, producing a drawdown, but also providing opportunities for healthy returns.
The US 10y closed the month 36.7bps higher and 5s-30s swap was 32.9bps flatter