WeeklyWatch – May inflation figures critically high, and Eurozone set to raise rates

14 June 2022

Stock Take

ECB rate rises

Inflationary pressures intensified last week, and the European Central Bank (ECB) declared that it was set to raise its key interest rate by 0.25% at its July monetary policy meeting – the first regional rate rise in more than a decade.

The Bank’s rate is currently -0.5%, meaning that it’ll remain negative – even after this increase. On the other hand, and in light of the fact that inflation is looking persistent, the ECB also said it anticipates having to raise interest rates once again in September. This could mean that rates turn to zero or become positive.

Inflation reached 8.1% in the EU in May – far surmounting the Bank’s target of 2%. Higher than its previous projections, the ECB said that inflation may well average 6.8% for 2022, falling to 3.5% in 2023 and 2.1% in 2024.

Christine Lagarde, President of the ECB, remarked:

“Russia’s unjustified aggression towards Ukraine continues to weigh on the economy in Europe and beyond. It is disrupting trade, is leading to shortages of materials, and is contributing to high energy and commodity prices.

“These factors will continue to weigh on confidence and dampen growth, especially in the near term. However, the conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labour market, fiscal support and savings built up during the pandemic.”

Even though the Bank has thus far lagged behind the UK and US in raising its rates, many commentators said they predict that the September rate rise will be larger than 0.25%. Increasing interest rates usually slows the performance of ‘growth’ company shares – for example, those in the technology sector – and may mean a rotation towards more ‘value’ orientated companies.

Claus Vistesen, Chief Eurozone Economist at Chief Eurozone Economist Pantheon Macroeconomics, commented:

“The ECB is unwilling to do 50 basis points in July – mainly because they don’t want to take rates to zero in one go. Ms Lagarde referred to the need for a gradual first step in lifting interest rates, referring to 25 basis points as “good practice”.

“50 basis points in September seems like a done deal. The President explicitly said that if the medium-term inflation expectations remain unchanged, they will hike by 50 basis points. We doubt that the central bank will be in a position to lower its medium-term inflation outlook by September, and as such, we have to believe in a 50bp hike.”

Struggling markets

Given high inflation and incoming rate rises, European markets understandably ran into difficulties last week. The MSCI Europe ex. UK index concluded the week -4.4% lower.

Markets likewise continued to struggle in the US.

Following the news from the US Bureau of Labor Statistics that inflation hit 8.6% in May – markedly higher than many anticipated and the highest rate since 1981 – the S&P 500 and the NASDAQ dropped, closing the week down 5.1% and 5.6% respectively, their worst weeks since January.

Mark Dowding, Chief Investment Officer at Bluebay, believes that the medium-term situation doesn’t look quite so critical, even though this may sound disturbing.

“US economic activity data remains relatively healthy, and with consumer and business balance sheets in strong shape, we continue to see recession as a risk case, rather than a central probability. Further evidence of the underlying strength of the US economy is shown in fiscal data, with the US Federal deficit shrinking at a rapid rate.”

The economic situation in the UK is also witnessing economic headwinds. At the very start of this week, it was reported that the UK’s GDP unexpectedly shrunk in April by 0.3% – prompting fears of a recession this year.

Tony Danker, the Director-General of the Confederation of British Industry, responded as follows:

“Let me be clear – we’re expecting the economy to be pretty much stagnant. It won’t take much to tip us into a recession. And even if we don’t, it will feel like one for too many people.”

The Bank of England are due to meet later this week, leading to the understanding that further interest rate rises are on the horizon.

Wealth Check

The life of a carer can be extremely demanding. The number of individuals caring informally for elderly relatives is set to continue rising, given that the older generation now tend to live for longer. The ranks of ‘sandwich carers’ – in other words, those who look after both their children and an elderly parent – are likely to rise too, as the average age of a first-time parent is increasing.

Available care for the elderly

Carers often find themselves very busy juggling commitments and, as a result, too many of them are left to fend for themselves, as they don’t know where to go for confidential advice. Even spending 10 minutes browsing the website of a reputable group, such as Age UK or Care UK, can give a sense of feeling supported and informed about the broader issues surrounding care.

Consider financial advice

Indeed, financial advisers are seen as being experts in tax and inheritance, yet much of their work also involves helping families source and fund appropriate care. This also includes supporting people who have become unpaid carers.

Check entitlements

Many family carers have rightly checked the financial status of their elderly relative in terms of their entitlement to support with care costs. Some state benefits may kick in after a period of time, or a parent’s needs may change, meaning it’s worth rechecking periodically.

Respite care

Some families may opt to bring in professional carers on a temporary basis, giving unpaid carers a much-needed break. Our advisers can advise how much you can expect to pay for care as well as outlining managing costs and foreseeing any issues that could come up.

Advocating for carers

Naturally, the wider family of elderly relatives may have input into their care; however, their perspective may well conflict with that of the carer, both in terms of practical arrangements and costings. Other family members can sometimes have inheritance in mind, therefore a neutral party – such as a financial adviser – may prove useful.

In The Picture

As the saying goes, it’s about time in the markets, not timing the markets. It’s not always possible to predict marked market bounces. As shown below, missing out on the best performing months over the last three decades would have had major consequences for long-term returns.

Past performance is not indicative of future performance.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“What really matters for economic success is innovation. If we want our country to succeed, we need to do what we’ve always done, and embrace new technologies and the people and culture that create them. No serious analysis of our prospects could conclude anything different.”

Rishi Sunak discusses the role innovation will play in the UK’s future.

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

Bluebay are fund managers 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.

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