WeeklyWatch – UK inflation forecasted at 4%, and US job recovery sustained

10 August 2021

Stock Take

Percentages at play

UK markets witnessed a growth spurt over the last week, as the Bank of England’s (BoE) Monetary Policy Committee predicted inflation for the year to reach 4%.

Despite the fact this is way above the BoE’s 2% target for inflation, and an upsurge compared to its 3% forecast from May, the central bank asserted that the current higher inflationary period was temporary, and that it anticipated it will revert to 2.25% in two years’ time.

On the upside, the BoE also augmented its GDP growth forecasts to 7.25% for 2021, 6% in 2022, and 1.5% in 2023.

Low key

And yet these figures were insufficient in swaying the majority of its Monetary Policy Committee to change the Bank’s course of action regarding interest rates and other forms of economic support, and so there was a unanimous vote to maintain the current low interest rates, and 7-1 to leave the Asset Purchase Facility unchanged.

Nevertheless, it observed that, in the instance where the economy might evolve largely in line with forecasts, “some modest tightening of monetary policy over the forecast period is likely to be necessary”. David Page, Head of Macro Research at AXA Investment Managers, shares that he had foreseen these actions.

He added:

“The fact that despite a large upward revision to Q2 GDP from May’s report, that fact that expected GDP is now lower by end-Q3 than seen in May reflects our own outlook on the economy. Indeed, while acknowledging the uncertainty, we still see some downside risk to GDP growth in 2021 compared to the bank of England.

“We forecast UK GDP growth at 6.7% for 2021, compared to the BoE’s 7.25% and 5.7% next year, compared to 6%. However, much of this reflects an expectation of a slower rebound than the BoE, spread more into 2022, which should leave GDP growth for 2023 closer to 2% in our view. This is in part why we still consider a tightening in monetary policy as unlikely in 2022.”

In the wake of the update, UK markets dropped momentarily on the somewhat more aggressive tone and higher inflation fears. On the whole, however, last week saw the FTSE 100 finish on a positive note.

Markets turn their attention to central bank policy because higher interest rates could be problematic for the share prices of the companies that have experienced surging share prices over the past year and a half. Some large technology companies, for instance, are trading at high valuations compared to their earnings. This is, in part, because of the way that low interest rates are likely to positively impact share prices.

Lion’s share

In other news, European shares went from strength to strength, with the STOXX Europe 600 Index reaching yet more record highs over the week, as a series of large companies posted boosted earnings during the week. This was the third straight week of gains for the index, as the EU continued its post-pandemic recovery.

In the US, Thursday witnessed both the S&P 500 and the NASDAQ move further into record territory in anticipation of the monthly employment data – reported on Friday morning.

The eventual release of these figures on Friday also disclosed that the country had added 943,000 non-farm jobs in July – above consensus economist predictions, and up from last month’s figures. More than half of the new private sector jobs were in leisure and hospitality.

Delve deeper

These figures certainly make for happy headlines, yet Ian Shepherdson, Chief Economist at Pantheon Economics, warned that the detail is complicated:

“Headline payrolls were flattered by a 240K leap in government jobs, only slightly more than we expected and mostly (231K) in state and local education jobs, continuing the reversal of the COVID-19 hit. The rate of increase in this component now will slow sharply.”

What’s more, it’s worth bearing in mind that the last two weeks have seen a strong rise in the Delta variant of COVID-19 across several states, and so these figures won’t fully take into account any subsequent impact on employment.

In spite of that, the strong employment growth will be giving US central bank policymakers something to ponder on in the run-up to their meeting at Jackson Hole, Wyoming, later this month for the annual Economic Symposium. We’re the Federal Reserve planning to announce any change in tone or policy, that will undoubtedly be the scene of the action.

With mounting speculation that the US Government might release a statement relating to a rate rise later this month, the NASDAQ dipped on Friday – it did, however, nevertheless round off the week up. The S&P500 grew on Friday, resulting in a record-high end to the week.

Meanwhile, Asian markets had a more sedate week compared to the end of July, with many markets posting small growths for the week. However, due to time differences, any knock-on effect from the US job increases will not be visible until this week.

Wealth Check

The 16-day Tokyo 2020 Olympic tournament came to a close at the weekend. One of the biggest talking points from this tournament involved US gymnast Simone Biles, who drew attention to the pressures and psychological challenges endured by elite athletes.

On the topic of retirement planning, people’s challenges can be similar to those of athletes, in that they often have difficulty envisaging themselves decades into the future, as ‘old’ people. Struggling to empathise with our future selves can prove difficult when it comes to locking away money in pension accounts that can’t be accessed until the age of 55 at the earliest – even for individuals who are fully aware that tax relief means pensions are one of the most appealing ways to save and invest.

One effective way of overcoming these obstacles to meeting retirement goals is to use the very same visualisation techniques that elite sportspeople practise to boost their motivation. An athlete will imagine themselves mounting the podium to receive a medal, while retirement savers should picture themselves at an older age and open their mind to what it feels like to be unshackled from any unwanted burdens around work.

If money were no object, where would you live? Would you divide your time between different homes or countries? Consider what hobbies or interests you would take up if you had fewer demands on your time. How about a change of career, or starting up a business or volunteering for a good cause? The sky’s the limit when you have a substantial retirement fund to support you.

Set aside some quality time to really get a sense of what your future life could be like once you reach your financial goals. Doing this on a regular basis, and particularly when you’re feeling unmotivated, can be a powerful way of getting into the headspace for financial success.

Your Wellesley financial adviser is there to offer you professional pension advice and keep you motivated and on track with saving and investing for retirement.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

 

The Last Word

“You have accepted what seemed unimaginable, understood what had to be done, and through hard work and perseverance overcome unbelievable challenges. This has made you true Olympians.”

Tokyo 2020 President Seiko Hashimoto addresses athletes at the Olympic closing ceremony.

 

The information contained is correct as at the date of the article.

Axa Investment Managers is a fund manager for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2020. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2021; all rights reserved.