알렉스 브러 머: Higher global interest rates could play havoc on the over-exuberant financial markets
The tide on global interest rates looks to be turning.
It is not just the Bank of England which is feeling the heat as consumer prices surge to an 11-year high of 4.2 per cent but the Federal Reserve and the European Central Bank.
The combination of pandemic-induced fiscal laxity, monetary accommodation and bubbles on the markets is radically reshaping the economic landscape. In the UK it is hard to see the Bank of England resisting pressure for an interest rate rise as soon as December.
Rates rise: It is not just the Bank of England which is feeling the heat as consumer prices surge to an eleven year high of 4.2% but the Federal Reserve and the European Central Bank too
What is more surprising is the mood change in the US. Until now the view at the Fed and on Wall Street is that normalising interest rates from super-low levels will wait until the central bank completes its programme of bond buying next year.
What has changed is the runaway recovery of the G7’s most resilient economy and the outsized inflation it brings with it.
The US is heading for the fastest growth in a generation, retailers’ sales are booming, wages to the lowest-paid workers are soaring, hiring of new employees is surging and many household bank balances are flush.
There is impatience about the Fed’s unwillingness to withdraw the punchbowl. Morgan Stanley boss James Gorman, who sits on the New York Fed board, thinks it is time to end the delays and move directly to raise the key federal funds rate, which guides all other US borrowing costs, from the current near-zero level.
The theory among New York bankers is that the only reason the Republican Fed chairman Jay Powell is holding back from raising rates is that he wants to convince President Joe Biden that he is on-side and be reappointed to a second term when the decision is taken within the next few days.
The irony is that the growth take-off is hurting rather than helping the president because the public doesn’t like the runaway prices.
The current dissonance with the Fed could make it easier for the president to nominate Democrat economist Lael Brainard, the only other candidate interviewed.
There is also blowback against Christine Lagarde’s money printing and super-low interest rate regime at the European Central Bank (ECB).
German ECB board member Isabel Schnabel warns that with inflation in the eurozone running at 4.1 per cent the bank must be ready to rein in the cost of living.
Transitory inflation has been ejected from the central bank lexicon. Taming the prices tiger is again seen as necessary.
The impact of that on the over-exuberant financial markets could be the next serious narrative.
For too long company boards have been in the thrall of activists who are often armed with nothing more than shares rented from big battalion institutions and complex derivatives.
Many corporate boards are too complacent, and agents of change are necessary.
It would be far better if the activism came from the real owners of the enterprises rather than get-rich-quick financiers.
The power company SSE may not be that popular in this time of soaring energy costs but it has shown serial nuisance Paul Singer the red card.
In the wake of COP26, the decision to invest £12.5billion in renewable capacity by 2026 has to be applauded.
It is setting an example for the other big energy utilities. What is disappointing is that vision gets few rewards and short-termism drove the SSE share price down by 4.3 per cent in latest trading.
SSE is not the only FTSE 100 company keeping the activists at bay.
Chief executive Emma Walmsley is doing an admirable job of doing it her way at Glaxosmithkline with new treatments, including a breakthrough in HIV, emerging from the pipeline fast and furious. Valuations now being placed on its consumer health care enterprise, when it is split out, are much higher than originally envisaged.
Jes Staley’s stewardship at Barclays ended in tawdry fashion and a row over his pay. But his relentless pursuit of the investment banking dollar saw off the challenge of New York-based activist Ed Bramson.
Could be a trend.
If there was doubt as to where the real power now lies in global commerce the issue has been clarified by Amazon’s decision to sack the US card giant Visa – sending its shares skidding.
The biggest threat to traditional finance are the Silicon Valley giants.
They are starting to flex their muscles.