The World In A Week - Rate cuts: a step closer
Written by Shane Balkham
In July, the Fed’s preferred measure of inflation, known as the core personal consumption expenditures (PCE) price index, which excludes volatile food and energy items, rose by 0.2% month-over-month. This mild increase has reinforced the Federal Reserve’s plan to start cutting interest rates at the next meeting in September.
Furthermore, consumer spending, which makes up more than two-thirds of US economic activity, saw a notable increase of 0.5% in July. While this may suggest that the economy remains strong and might temper expectations for a significant Fed rate cut, income growth was modest at 0.3%, and the savings rate declined to 2.9% from 3.1% in June. Some arguments suggest consumers are likely tapping into their savings to maintain spending, therefore, future spending may not be sustainable and may reflect ongoing financial stress in a high interest rate environment. However, others argue that the income figures might be understated, as they may not fully account for earnings by individuals working without legal documentation.
Nonetheless, the labour market is another key factor in the Fed’s decision-making process. With some signs of weakness emerging, Fed officials are paying close attention to how employment trends could impact consumer spending, which is the main driver of the economy. The August jobs report, due this week, will be crucial in shaping their decisions at the upcoming September meeting.
Across the Atlantic, the Eurozone is also seeing a slowdown in inflation. In August, year-over-year prices increased by 2.2%, down from 2.6% in July. This marks the lowest inflation rate in three years, and investors are already anticipating that the European Central Bank (ECB) will further reduce interest rates before the year ends. However, some policymakers remain cautious, noting that the battle against inflation isn’t over, particularly in the services sector where prices continue to rise, increasing 4.2% in August from 4.0% in July. Nevertheless, this news has been supportive for European equities, with the MSCI Europe ex-UK returning +0.8% over the last week and extending gains to +1.8% for the month, both in GBP terms.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 2nd September 2024.
© 2024 YOU Asset Management. All rights reserved.
The World In A Week - Is a June rate cut still on the cards for the UK?
Written by Ashwin Gurung
According to official figures from the Office for National Statistics, the UK’s annual headline inflation fell to 2.3% in April, its lowest level since July 2021, down from 3.2% in March. However, this decrease was less than the anticipated 2.1%. Similarly, annual services inflation declined slightly from 6.0% to 5.9%, also falling short of expectations. These outcomes may have reduced the likelihood of the Bank of England (BoE) cutting interest rates as early as June. While inflation is on a downward trend and nearing its target rate, it remains sticky.
During the week, the UK Prime Minister Rishi Sunak announced a snap general election for July 4th. Some market participants believe that this development makes a rate cut in June even less likely than before. However, it is important to note that the BoE has independence from the Government in terms of how it carries out its responsibilities i.e., free from political influence, so the general election should have no direct impact on the decision of rates cuts in June.
Similarly, from an investment perspective, we don't expect the upcoming general election to significantly explain the performance of UK stocks. Data has shown that the election's impact is much lower compared to other economic factors such as monetary policy decisions, and their impact on markets is also incredibly difficult to foresee. Whatever the outcome, we remain positive on UK Equities as they continue to benefit from companies reporting positive earnings, implementing stock buy-backs, and higher mergers & acquisitions activity where we have seen numerous UK companies being bid for at premiums to their valuation. UK listed companies are considered to be attractively priced by both domestic and foreign companies.
In the US, market expectations are also leaning towards a delay in anticipated rate cuts due to continued strength in consumption and higher economic growth. The Federal Reserve's minutes from April’s policy meeting also highlighted the worry amongst Fed officials that there has been more limited progress on inflation than hoped. Members expressed a lack of confidence in proceeding with rate cuts given this uncertainty.
On the other hand, Japan is dealing with the opposite challenge of keeping inflation sustained. In April, Japan’s core inflation (which excludes fresh food) declined for a second consecutive month to 2.2%, while staying above the Bank of Japan’s (BoJ) price target. However, the trend is expected to reverse in the upcoming months as numerous Japanese companies prepare to implement the most substantial wage hikes in over three decades in spring wage negotiations. The BoJ is also optimistic that this will spur both spending and prices, ultimately increasing inflation.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 28th May 2024.
© 2024 YOU Asset Management. All rights reserved.