Issue 30
Dear all,
As we enter August, the world remains rather unstable with inflation being a little less aggressive and interest rates rising in the US, UK and Europe. However UK core inflation has dropped to 6.8% in July down from 7.9% in June, which is very positive move in the right direction and provides some light at least. The Bank of England (BOE) target of 2% is unlikely to be hit for some time, but the expectation is that inflation will fall to 5.2% by the end of 2023 and to 3.9% by the end of 2024. As the effect of interest rate rises are expected to reduce spending, bringing prices down and ultimately seeing a reversal of interest rates, which are expected to peak at 5.5% this year. The BOE does expect inflation to return to its target of 2% by quarter two, 2025.
The threat of stagflation is being caused by various factors at work, such as the appalling war in Ukraine, the Chinese economy facing its own issues of slowing growth and weather patterns affecting arable production in Europe. Furthermore, the UK is still getting to grips with Brexit and the lack of labour that comes with it and then a general election in 2024. As a result of Brexit, Covid and the Ukraine war analysts are expecting stuttering growth over the next two years and GDP is set to only recover to its 2019 level in quarter three, 2024. The need to address the UK’s poor growth remains the key challenge facing policy makers as we approach the next election.
Most major stock markets fell at the end of July, after rating agency Fitch downgraded the US government’s credit rating; this marked the second time in history that a leading credit agency has downgraded US debt. Fitch cut the US rating from AAA to AA+, citing concerns about the state of the country’s finances and its additional debt burden. The announcement weighed on stocks, with the S&P 500, Dow and Nasdaq finishing the week down 2.4%, 1.4% and 3.0%, respectively.
The UK’s FTSE 100 lost 1.8% after the BOE indicated that interest rates were likely to stay higher for longer. The Pan-European Stoxx 600 and Germany’s Dax fell 2.6% and 3.0% respectively, following disappointing European corporate earnings reports. In China, the Shanghai Composite was flat as investors weighed measures that aim to boost consumption and support the real-estate market against a 33.1% year-on year slump in new home sales in July.
UK
Last week saw the BOE lift the UK’s base interest rate by a quarter of a percentage point to 5.25%, a new 15-year high. In its statement, the BOE said that some key indicators, notably wage growth, “suggest that some of the risks from more persistent inflationary pressures may have begun to crystallise”. The BOE hinted that interest rates were likely to stay high for some time, stating it would “ensure the bank rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target”. The BOE expects inflation to fall to 4.9% by the end of the year, although it does not forecast a recession in the coming years, gross domestic product (GDP) is expected to remain below pre-pandemic levels as a result of high interest rates.
UK house prices fell in July at their fastest annual rate since 2009, according to Nationwide. This is a drop of 0.2% from the previous month and a further drop of 3.8% a year ago, which was in fact worse than the 3.5% annual decline seen in June this year. The price of a typical home is now 4.5% below the August 2022 peak. Robert Gardner, Nationwide’s chief economist, said housing affordability remains stretched for those looking to buy a home with a mortgage. For example, a first-time buyer with a 20% deposit who earns the average wage would see monthly mortgage payments account for 43% of their take-home pay (assuming a 6% mortgage rate). This is up from 32% a year ago and well above the long running average of 29%. Separate data from the BOE showed the value of net mortgage lending fell in the second quarter compared to the first quarter of 2023, marking the first quarterly contraction since records began in 1987.
US labour market cools in the US
Friday’s closely watched non-farm payrolls report showed the labour market had cooled slightly in July. The economy added 187,000 new jobs, slightly below expectations of 200,000. The figure for June was revised lower to 185,000 from 209,000, while May’s number was reduced by 25,000 to 281,000. The report from the Labour Department also showed the unemployment rate fell back down to 3.5% from 3.6% the previous month, showing continued tightness in the labour market. Average hourly earnings rose by 0.4% month-on-month, which is above what is considered consistent with the Federal Reserve hitting its inflation target.
Japan
As Japan’s services sector softened, activity grew at a slower pace in July as new business growth eased and cost pressures remained high. Meanwhile, the manufacturing Purchasing Managers Index (PMI) slipped further into contraction territory to 49.6 in July from 49.8 in June. Firms attributed the decline to weak customer demand for manufactured goods in both domestic and international markets. More positively, input-price inflation eased to the softest level since February 2021, and business confidence was the second highest in 18 months. The Japanese stock market has performed well in 2023 to date.
China – Good news for the west
China’s deflation “should help” in the UK’s battle to bring down inflation, according to a chief economist at Standard Chartered. The consumer prices index for the world’s second largest economy fell 0.3pc in the year to July, according to the National Bureau of Statistics (NBS). It was the first year-on-year decline since February 2021 after inflation was unchanged in June.
China also revealed that factory gate prices extended their declines, with the Producer Prices Index (PPI) falling for a 10th consecutive month. Manufacturers in China are cutting prices to get rid of excess stock amid slowing consumer demand combined with an ongoing property slump.
Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered, said deflation in China “should help inflation in the US and Europe to moderate” as the prices businesses pay for goods falls.
Summary
As we know, headwinds remain globally with inflation at the head of the arrow; if we can see this remain under control then there is hope. An end to Ukraine or even a ceasefire would help, not only the economies, but also the environment. The current global position makes the credit crisis look like a tea party as things currently stand. I cannot remember a time when so many problems have arisen all at once. We have to hope that normality returns, for corporate earnings to improve and share prices can hopefully get back to where they should be and boost portfolio values.
One benefit of rising interest rates is of course higher savings rates. There are some exceptional deals around for fixed-rate bonds between 1 and 5 years. The best 5-year cash ISA fixed rate at present is with the Shawbrook Bank at 5.22% for 5 years. Please see www.moneyfacts.co.uk for the best rates. Now is the time to fix for 3 to 5 years, because the rates next year are likely to be lower and we are unlikely to return to these levels for many years.
Stagflation definition
Stagflation is an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as, attempting to correct one of the factors can ultimately exacerbate another.
Stagflation is generally considered worse than a recession because it is a much more challenging economic condition to manage. In a recession, the central bank can lower interest rates to encourage borrowing and spending, which can stimulate economic growth.
In the 1970s, inflation became entrenched through a self-reinforcing “wage-price spiral” in which higher costs led to higher wage demands, which resulted in rising costs. Since then, labour markets have experienced several structural changes that make a wage-price spiral much less likely.
Historical data from previous periods of stagflation show us that gold, energy stocks, agricultural stocks, and real estate are particularly top performers during stagflation.
New Service
Our new Discretionary service is a significant step forward in terms of efficiency. This is fundamentally an administration change with the added benefit of additional market and fund support provided by LGT. We will have the ability to review this relationship and improve it as required on an ongoing basis, but the move to a Discretionary service will remain as our preferred strategy, due to the operational efficiency it brings. We are still your Financial Advisers; nothing has changed on that front. Your current Platforms will remain the same, so there will be very little changes on the surface; it will be behind the scenes administration that will experience the most changes. We are confident that the change will improve service and ultimately performance, but of course we still need markets to be positive because you can’t defy gravity.
Best Wishes
Mark & Team
UK wage growth has strengthened, heaping pressure on the Bank of England to keep raising interest rates to avoid an inflationary spiral.
Regular pay (excluding bonuses) rose by 7.2% per year in the February-April quarter, the latest figures from the Office for National Statistics show, up from 6.6% in November-January.
That is the fastest growth rate for basic pay on record, if you exclude the COVID-19 pandemic which distorted wage data. Wages were boosted by the 9.7% rise in the minimum wage in April.
Total pay, including bonuses, grew by 6.5% per year in the three months to April.
Although pay is still not rising fast enough to match the rate of increase in households’ living costs, economists said wage growth was well above levels consistent with the Bank of England’s 2% inflation target, underlining the case for the central bank to continue raising interest rates.
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China’s economy expanded at a slower-than-expected pace in the second quarter (Q2), at an annual rate of 6.3%, though accelerating from Q1’s 4.5%.
This reflected sluggish demand as retail sales posted their weakest growth since December, slowing sharply to 3.1% in June from 12.7% in May. However, strong manufacturing activity helped drive a surprise uptick in China’s industrial production in June, which grew 4.4% compared to a year earlier from May’s 3.5%. Last week the country’s government announced plans to boost household spending, amid calls for greater stimulus to drive China’s post-pandemic recovery.
Eurozone annual inflation was confirmed at 5.5% in June, down from 6.1% in May – the lowest since the start of 2022, but still above the European Central Bank’s (ECB) 2% target.
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Amazon considering becoming major investor in British chip designer Arm
Amazon has held talks about investing in the planned $60bn (£47bn) float of Britain’s Arm as the online retail giant turns to the microchip designer’s technology to help power its data centres.
Senior technology reporter Matthew Field has the latest:
Amazon is one of several technology giants considering taking part in the public listing, expected to take place next month.
Chip giants Intel and Nvidia have also held talks about investing as part of the float as a so-called anchor investor, a business that buys up a significant number of shares as part of the deal, as has Google-owner Alphabet. SoftBank, the Japanese technology investor that owns Arm, is hoping a float of the microchip designer will raise as much as $10bn, a record amount for a British company, when it goes public in New York.
Arm and Amazon declined to comment. Reuters first reported Amazon’s interest.
An investment by Amazon would underscore the importance of semiconductor technology to the online retailer, whose fast growing internet infrastructure division, Amazon Web Services, has proved highly profitable. The online retail giant uses custom made microchips that are designed using Arm’s technology in its data centres, which prop up the online presence of thousands of businesses.
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We cannot be held responsible for the accuracy of the information contained herein. This newsletter is designed to provide information on topical events which have an impact on financial services. You should seek advice before taking any action relating to the content of this document. This letter is not a recommendation to invest.
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