10 August 2021
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.
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.
“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.
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.
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.