WeeklyWatch – Markets optimistic as inflation shows positive slowdown

20th June 2023

Stock Take

Stock Take

Investors’ reactions to inflation and interest rate news from the US meant a good week for global market performance.

US headline inflation fell to 4.1% in May, compared to 4.9% in April, and is now less than half of what it was a year ago.

A drop in energy prices facilitated the fall, but rising food prices have also slowed down. Because of this continued fall in inflation, the Federal Reserve chose not to increase interest rates for the first time in more than a year. Welcome news, as rates have jumped from 0.25% to 5.25% since it began increasing rates.

The Fed’s dilemmas

It’s a significant pause, but not a stop by any means – unless some unexpected economic data causes a rethink in the next few weeks, interest rates will go up again. Another two hikes are still expected this year.

Sebastian Mackay, Portfolio Manager at Invesco, noted that the Fed is facing two dilemmas. Of the first, he says:

“The scale and persistence of the inflation shock and the Fed’s initial inertia to respond means they no longer have the luxury of being forward-looking – they need to see hard evidence that inflation is on a steady downward path before they can begin cutting rates. At the same time, forward-looking indicators do indeed suggest that inflation will slow quite sharply over the next year. As a result, the risk is that the Fed’s focus on current inflation data results in them overcooking the tightening and bringing about a severe recession.”

The second dilemma lies in the differing outlooks of different sectors. For example, AI-related tech and advanced manufacturing are booming, while older industries with more debt are hurting from the higher interest rates. The Fed needs to balance the needs of all these businesses in its goal to reduce inflation without causing a sharp recession.

European markets lag

European inflation and interest rates remain behind the US, with eurozone inflation at a high 6.1% despite a steady downward trend.

Analysts therefore weren’t surprised to see the European Central Bank (ECB) lift interest rates again last week. At 3.5%, the key rate does at least remain below their American and British counterparts.

Mackay notes:

“Although CPI inflation has started to soften, the strength of the labour market, wages in particular, underpins the ECB’s concern about inflation remaining high for too long. The scale of excess inflation in Europe, coupled with the ECB’s single-minded focus on inflation, means there is an increased likelihood of the ECB persevering with interest rate hikes, even as growth indicators weaken. After all, they have form of hiking into a recession in 2008 and 2011.”

More central bank decisions in Asia

In China, which was slower than the West to come out of its COVID-19 lockdown, markets rose after the country’s central bank cut interest rates to help stimulate its post-COVID economic recovery.

Already somewhat of an outlier this past year, the Bank of Japan (BoJ) has maintained its trend of keeping interest rates low despite inflation above its 2% target by announcing they’re keeping the rates at their current level – causing Japanese markets to rise.

Martin Hennecke, Head of Asia & Middle East Investment Advisory & Comms at St James’s Place, said he was unsurprised by the BoJ’s actions, for a reason they may not want to promote:

“Japan has the highest sovereign debt burden across the developed world, which arguably can best be kept under control via negative real interest rates. This predicament might continue to support the country’s equity market though, as local savers with high cash exposure become increasingly wary of the risk of purchasing power loss and start to rediscover investing as an avenue for mid-longer term inflation protection.”

UK interest rate decision

Later this week, it’ll be the UK market’s turn for the spotlight as the Bank of England (BoE) announces its own interest rate decision. It’s widely expected that the bank will raise rates again, pushing them to at least 4.75%.

The BoE is increasingly being called to consider the impact of these increases on UK consumers. Last week, the average two-year fixed-rate mortgage hit 6%. Think tank The Resolution Foundation noted that people looking to remortgage their homes will end up paying on average £2,900 more per year from 2024.

Despite these fears, the FTSE still managed to finish over 1% up last week.

Wealth Check

Caring for people is rewarding, but it’s also challenging and can be emotionally and financially exhausting. There are currently 5.7 million carers supporting a loved one who is older, disabled or seriously ill across the UK today.1

And as the older generation continues to live for longer, the number of people informally caring for aged relatives is only likely to increase. This also goes for ‘sandwich carers’ – those who look after both their children and an elderly parent – due to a rise in the average age of people becoming first-time parents.

What support is available if you’re caring for an elderly person?

Financial advisers are, of course, experts in investing, tax and inheritance matters and retirement planning, but a lot of their work also involves helping people and families find appropriate care, meet the cost of it and manage life’s big transitions. Naturally, this includes helping people who have become unpaid carers.

Ros Clarke, Long-term Care Relationship Manager at St. James’s Place, explains:

“A good adviser will be able to answer your questions around care – including how much home care costs per hour or whether next-of-kin are responsible for care-home fees. This can be reassuring and help families with forward planning. But just as important is an adviser’s ability to explain what’s possible from a carer’s perspective. For example, a cash flow plan could show that a family could factor some practical help with caring into their budget. Sometimes, financial assets can be managed more effectively to pay off a mortgage, reduce debts or create an income stream.”

Another option is to check the financial status of their elderly relative with regard to their entitlement to help with care costs.

For some families, bringing in professional carers on a temporary basis (either in the home or through residential care) may be an option, which gives unpaid carers a break.

Clarke says:

“Our advisers can outline how much you can expect to pay for care either at home or in a care home based on the individual’s needs. They can advise on managing costs and anticipating any issues that could arise.”

1Facts & Figures, Carers UK, accessed May 2023

The Last Word

“I know the anxiety people will have about the mortgage rates, that is why the first priority I set out at the beginning of the year was to halve inflation because that is the best and most important way that we can keep costs and interest rates down for people.”

Prime Minister Rishi Sunak says he ‘intends to stick to the plan’ and focus on reducing inflation.

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SJP approved 20/06/2023