Bank of England governor Mark Carney is in the spotlight again, flip-flopping between dovish and, more recently, hawkish comments. 
This is against the backdrop of August UK consumer price inflation hitting a five-year high, rates elsewhere in the world edging upwards and central bank rhetoric becoming more hawkish.
Comments from the Monetary Policy Committee (MPC) have seen UK government bonds sell-off and sterling strengthen, as markets start to price in a rate hike, potentially as soon as November. In fact, the 10-year gilt moved from around 1 per cent to 1.3 per cent, losing capital value of almost 3 per cent in two weeks - quite a lot for a so-called risk-free asset, and almost amounting to three years’ worth of income.
It’s easy to criticise central bankers, blaming them for the world’s ills. But many of the traditional relationships that have worked in the past have broken, for example, the link between unemployment and wage growth, and the monetary base and inflation.
In addition, it can’t be easy crafting an exit from QE, especially with an eye on the weakening housing market. That said, Carney has fallen short in terms of communication, and a disconnect between the MPC and the market is evident and is eroding credibility, at what could be a crucial time.
But what does the data say? In favour of a rate rise, consumer price inflation has picked up (2.9 per cent in August, albeit much of this reflects a weaker sterling, rather than domestic inflationary pressures), as has global activity, which is important, as the UK is a highly open economy.
In favour of no move, 2.1 per cent wage growth remains uninspiring, while domestic consumption, an important part of the economy, remains subdued (in part as real wage growth is negative), while domestic activity is not exactly roaring ahead.
There are also some wild cards. Brexit being the big one. Not least the negative effect of the uncertainty on business and consumer confidence.
Indeed, Carney made an interesting speech to the IMF on 18 September. He focused a good chunk of the speech on Brexit, noting the importance of the changing relationship with the UK’s largest trading partner. He argued, convincingly, that if the forces of globalisation are in large part behind deflationary pressures on wages and consumer goods, de-globalisation (in this case Brexit) should be inflationary in the short term (at least, before new relationships are established and settle down).
Other wild cards are the removal of the public sector pay cap. This would likely have a limited impact in the first instance (with the public sector employing only 17 per cent of the workforce) but it might contribute to changing the psyche towards wages and inflation.
Anecdotally, the same week as Carney’s speech, Cadbury’s, not a major employer, but at the same time not insignificant, announced they were going to bring workers’ pay more into line with inflation, including from next year basing it on the retail price index (currently 3.9 per cent).
In summary, it seems that the MPC is preparing the market for a hike in November, retaining some optionality because data is mixed, while the recent sterling strength and higher gilt yields have already tightened financial conditions (though this will need to be sustained to have any material impact).
Importantly, recent events also serve as a reminder as to the risk/reward profile for low yielding bonds with long durations.
We continue to have very little exposure to the UK domestic economy and our UK bonds have a short average duration.
Meanwhile, we expect sterling to remain volatile, against the backdrop of a mixed domestic economic environment and, no doubt, some political surprises in the pipeline. Getting a sense for the shape of the economy, post-Brexit, will be one of the triggers for us to re-assess our position.
Anthony Rayner is manager of Miton’s multi-asset fund range. The views expressed above are his own and should not be taken as investment advice.