WeeklyWatch – Soaring interest rates and inflation consume markets

19 July 2022

Stock Take

The campaign game

The elimination game of Musical Chairs is called ‘Reise Nach Jerusalem’ in Germany – a name said to be inspired by the Crusades. Whether or not this theory is correct, the game of finding Boris Johnson’s successor became more and more fierce last week, and by this Thursday, just two candidates and one chair will remain.

Tax cut promises have featured heavily in the campaign, in spite of the warning from the Office for Budget Responsibility that unless spending is curbed and taxes are raised, UK debt is on an “unsustainable path”. Last week, the CBI business group added its misgivings in an open letter, appealing to the candidates to focus on growth and a tax system overhaul, rather than quick cuts. It went on to describe the level of inflation pressure on businesses and households as “eye-watering”.

Data doesn’t lie

This week will see the release of inflation figures for June, along with the latest employment numbers, which are set to serve as strong indicators of whether the Bank of England will accelerate interest rate rises. Given that GDP figures for May came in better than expected last week, the pressure to do so has increased. The UK economy defied consensus forecasts of no growth, by expanding 0.5% – driven by healthcare services and signs of recovery in the construction and manufacturing sectors.

Nevertheless, June will more than likely show a large contraction because of the additional Platinum Jubilee Bank Holiday and the disruption to transport services from industrial action. Activity – especially in the retail sector – likewise looks set to be dampened this month, due to the current heatwave.

The British Retail Consortium announced that retail sales are dropping at a rate comparable to that of the middle of the pandemic, which only highlights the pressure on households’ finances. In-store and online sales have fallen for three consecutive months, with furniture, home appliances and computing the biggest victims.

In spite of growth concerns, the Bank of England is under pressure to continue raising interest rates so as to reduce the risk of higher inflation becoming ingrained. “The next Monetary Policy Committee meeting on 4 August should deliver an increase in interest rates of at least 0.25%,” commented Azad Zangana, Senior European Economist at Schroders. “The argument for a larger rise, however, is strengthening.”

US inflation high

The US had a similar tale to tell about rising inflation last week. In the 12 months to June, it reached 9.1% – the highest level for more than 40 years, with fuel and food costs being the main reasons. American families are being hard hit on the financial front, with signs that people are changing their spending habits and dipping into savings to pay for housing and food.

President Biden’s administration downplayed the backward-looking figures, but will nevertheless be concerned, given that mid-term elections are on the horizon for November and its popularity is falling as inflation has surged.

Markets had already thought to price-in expectations of a three-quarter point interest rate rise from the Federal Reserve at the end of this month, yet the hotter-than-anticipated inflation figures sent Wall Street lower on Wednesday due to fears about a full percentage point rise. By the close of the week, however, news of a surprise gain in retail sales and comments from Fed officials meant those expectations did a U-turn and US stocks recovered ground.

Euro fears

The euro dropped below the dollar for the first time in 20 years last week too – weakened by concerns that restrictions on energy supplies from Russia will heighten the risk of recession, not to mention fears that the European Central Bank has dragged behind other central banks when it comes to raising rates.

The impact of a weakening currency will mean imports are more expensive for eurozone countries, particularly goods priced in US dollars such as crude oil, which will then create higher inflation pressure – it’s already running at 8.6%.

Lockdown slowdown?

Official figures released last week confirmed that the world’s second largest economy, China, has felt the brunt of recent COVID-19 lockdowns. Activity contracted sharply in the second quarter, with GDP falling 2.6% from the previous quarter – yet there were some positives, too. Unemployment fell to 3.5% and retail sales outperformed – however, many analysts aren’t holding their breath for a quick recovery as the government forges on with its strict zero-COVID approach to slowing the spread of the virus.

Global growth gloomy…

Ahead of a meeting of central bank governors and G20 finance ministers in Bali, Kristalina Georgieva – the head of the International Monetary Fund – said it would downgrade its expectations of global economic growth this month. She forewarned that the outlook had “darkened significantly” because of the impact of the Russia–Ukraine war, higher inflation, and the ongoing pandemic, and commented that central bank action on interest rates will “need to continue”. The IMF reported that 75 central banks have raised interest rates 3.8 times, on average, in the last year.

…but grain deal imminent

There was some positive news to end the week, with Turkey announcing that a deal was imminent to end the Ukrainian grain blockade. Russia, Ukraine, Turkey and the United Nations are now due to sign a deal next week.

Wealth Check

The psychological impact of the pandemic persists, and stressors have become more about finances than health. Yet there are ways of counteracting this in order to protect your mental and financial well-being. The root causes of such psychological problems are growing, with COVID-19 bringing two years of reduced incomes and stress for many people. A large number are still recovering, but are also now faced with other tough situations, such as the Ukraine war, raging inflation and volatile stock markets.

Perhaps the time has come to talk with an adviser.

Harriet Shepherd, Financial Well-being Manager at St. James’s Place, says:

“If you have negative emotions around your finances, it’s time to talk to a professional – whether that’s a debt counsellor, financial planner or other kind of adviser.

“Your adviser can field any of your questions such as: am I still on track for my retirement plan? Should I do anything now, such as cut spending? What should I do if my financial or family situation has changed? How can I stop inflation eroding my savings? No question is too small or stupid.”

Speak to your adviser sooner rather than later. A report by the International Longevity Centre discovered that receiving professional advice between 2001 and 2006 boosted wealth by £47,706 in 2014/16.1 Financial advisers add this value by helping you use the right tax wrappers, avoid scams, gain the confidence to save and invest, and tailor your portfolios to align with your goals. What’s more, they can also help you make logical decisions and avoid costly mistakes during uncertain times.

Even if you believe you’re on track, it’s always wise to be assured that you’re doing the right thing, as this is key to well-being. Financial advice is more than numbers on a page – it can support you to map out the future you want and markedly boost your financial well-being and mental health.

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

Sources:

1What It’s Worth – Revisiting the Value of Financial Advice, International Longevity Centre, November 2019 based on 2014/2016 calculations. Receiving professional financial advice between 2001 and 2006 resulted in a total boost to wealth (in pensions and financial assets) of £47,706 in 2014/2016.

In the Picture

In spite of the short-term fluctuations brought about by market disruptions, history tells us that investing in assets such as equities, bonds and commercial property is the best way to grow capital and protect it from inflation over the long term. The below chart is on a cumulative basis:

Sources:

Bloomberg/financial Express. Data from 1 January 1987 to 31 December 2021. All figures are calculated on a total return basis, which includes the reinvestment of income. Equities are represented by the FTSE All Share Index. Bonds are represented by the FTSE Gilts All Stocks Index. Cash is represented by the Bank of England Base Rate. Property is represented by the MSCI UK Monthly Benchmark. lnflation is measured by the Retail Prices Index. Only cash deposited with a bank or building society can provide the security of the capital invested. Please be aware that past performance is not indicative of future performance.

MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. *The MSCI Property index returns are to the end of 2019 as the daily 2020 data is currently unavailable.

London Stock Exchange Group plc and its group undertakings (collectively, the ‘’LSE Group”). © LSE Group 2022. 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 licence.

The Last Word

“This year’s World Population Day falls during a milestone year, when we anticipate the birth of the Earth’s eight billionth inhabitant. This is an occasion to celebrate our diversity, recognise our common humanity, and marvel at advancements in health.”

– UN Secretary-General António Guterres comments on the UN’s prediction that the human population will hit 8 billion on 15 November 2022.

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

Schroders 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.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2022. 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.

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