WeeklyWatch – Inflation pressures continue to simmer across the board for global markets

17^th April 2023

Stock Take

Cooling but still too hot

Last week, markets were focused on the latest US inflation data, which was released on Wednesday. Investors were keeping a close eye for signs that the Federal Reserve might change tack with its interest rate policy.

The results from this data showed that, at 5%, US inflation has fallen to its lowest level since May 2021 – a one percentage point drop that showed the largest downward swing in over eight years. This was likely due to the big inflation spike last spring, and there were still some worrying signs under the surface. Core inflation, which doesn’t include more volatile food and energy prices, actually accelerated to its highest rate in nearly two years as rental costs remained stubbornly high.

Initially, Wall Street and European markets rallied at this news, but this was short-lived after seeing minutes from the Fed’s last policy meeting indicating banking stress could tip the US economy into a ‘mild recession’ later this year.

All this suggests that a further rate rise next month is practically a given. Keith Wade, Chief Economist at Schroders, commented:

“Barring another major bank failure, we expect policymakers to focus on inflation and raise rates by another 0.25% at their next meeting on 3^rd May. Beyond this, if the recent softening in labour demand is sustained as we expect, then inflation should moderate more convincingly, reassuring the committee that further policy tightening is not required.”

Central banks are hitting pause

Singapore became the fifth central bank to hit pause, joining economies such as Australia, India, South Korea and Canada in halting its tightening policy. The worry about persistent inflation has, for now, been outweighed by concerns about global growth.

There’s widespread belief that the Federal Reserve will also pause its rate hikes imminently, but little agreement on when this might happen. Mark Dowding of BlueBay Asset Management suggested:

“We remain sceptical that inflation and growth will moderate enough to justify the rate cuts – of two 0.25% reductions by year-end – that are currently priced into market expectations from September.”

Colin Graham of Robeco, investment consultants for St. James’s Place, agrees:

“Our core investment scenario is for tighter monetary policy to lead to much lower nominal economic growth later this year, though we believe that central banks do not have room to cut rates until inflation is defeated or economic growth slumps precipitously.”

China’s consumer inflation has also hit an 18-month low, bolstering the case for global inflation to ease. Along with this, factory-gate price declines sped up in March due to continued weak demand. China’s consumer and industrial sectors continue to struggle to recover from their pandemic hit, prompting analysts to think consumer inflation could fall short of Beijing’s official targets this year.

Japan remains an outlier

Japanese stocks started the year strong and made more ground at the beginning of the week as markets welcomed the first public remarks of Kazuo Ueda, the new Governor of the Bank of Japan (BOJ), who vowed to maintain the central bank’s ultra-loose monetary policy.

At his first Group of Seven (G7) meeting in Washington on Wednesday, Ueda stressed that the BOJ will continue its monetary easing until its 2% inflation target is met in a stable and sustainable fashion.

ONS figures show no February growth in GDP

Thursday’s figures from the Office of National Statistics revealed a flatlining UK economy as industrial action and low energy consumption offset growth in areas like construction. The data missed consensus expectations of 0.1% growth, although GDP in January was revised upwards to 0.4%.

Before this, the International Monetary Fund (IMF) projected the UK economy will shrink by 0.3% in 2023 – making it the worst-performing major economy in the world this year. Chancellor Jeremy Hunt still insisted that the economic outlook was “brighter than expected” and the UK was “set to avoid recession”.

The IMF now expects global growth to fall from 3.4% in 2022 to 2.8% this year, before rising slowly and settling at 3% in five years’ time. It also expects a fall in real interest rates (which take inflation into account) to pre-pandemic levels due to low productivity and ageing populations – although it didn’t give timescales for this.

Friday came with the news that US retail sales fell more than expected in March – further evidence that the US economy may be losing steam. This is the second straight monthly decrease following a surge in January. Wall Street’s benchmark indices lost ground on the news, but fears about the banking sector were eased by quarterly results from the big US banks – JP Morgan Chase, Citigroup and Wells Fargo all came in ahead of estimates.

Wealth Check

Got questions about estate planning? Sarah Murphy, Chair of the Law Society’s Private Client Committee, answers some of the most frequently asked questions that lawyers encounter:

What if I can’t decide who gets what?

Even if you’re unsure about who to pass your wealth to, it doesn’t necessarily stop you from making a Will. You can build a discretionary trust into your Will, for example, which means what happens to your assets after you die will be decided by its trustees, who are appointed by you. If you have trustees you can rely on, and leave a letter of wishes, they can use this as guidance on how to distribute the funds. A letter of wishes can be amended as many times as you like in your lifetime without the need to continue going back to your lawyer.

It’s important, however, that you understand the purpose of a letter of wishes – it isn’t legally binding. The trustees can act according to their discretion, as well as taking your intentions into account – for example, by looking at the relationship you had with the beneficiaries and their current circumstances and tax position, etc.

What if the people I want to inherit are children or too young to manage the money responsibly?

It’s common to set up a trust for children or young people in this scenario. The trustees would then be guided by you as to how to distribute the funds on their behalf – paying for their maintenance or education, for instance. You can also state that they will receive the full estate at a certain age, commonly 21 or 25. In the meantime, you can rely on the trustees to make sensible decisions on your behalf.

What if my beneficiaries are vulnerable in some way?

If the beneficiary is disabled or has a long-term condition that means they’ll need someone to look after them after you die, you can set up a discretionary trust or a vulnerable person’s trust for them. The latter can be very tax-efficient, and you can make sure the money is invested in the right way to make sure the beneficiary is looked after for the rest of their life.

Trusts are not regulated by the Financial Conduct Authority.

In the Picture

A short-term lens can make returns look volatile. When viewed over a longer period, these fluctuations tend to smooth out.

Source: MSCI. Rolling daily discrete returns 2001–2023. Stock market represented by the MSCI World Index. Data as at 28^th March 2023.

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

“There’s also a strongly held view across all of our partners on the need for an immediate ceasefire and a return to talks. Talks that were very promising in putting Sudan on a path to a full transition to civilian-led government.”

US Secretary of State Anthony Blinken calls for a ceasefire after violence erupted in Sudan.

BlueBay and Schroders are fund managers for St. James’s Place.

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SJP Approved 17/04/2023