WeeklyWatch – Inflation changes plans

4th June 2024

Stock Take

A lane change in US consumer confidence

Following holidays in both the UK and US, markets drifted at the start of the week. Investors waited for Friday’s news as to whether consumer prices in the US and eurozone would be increasing slowly in order to keep interest rate cut optimism high.

US consumer confidence has been declining for the last three months, but news on Tuesday revealed that in May their confidence began to grow, which caught investors by surprise. The survey showed that optimism about the labour market remained consistent, which in turn is a driving force of the country’s economic expansion. Despite this, concerns about inflation endured. In addition, there was a rise in the number of consumers who expect the economy could fall into recession within the next 12 months.

Is growth for the US economy all good news?

Concerns surrounding lingering inflation and higher-for-longer interest rates across major economies placed pressure on Asian and US stocks on Thursday.

Ahead of Friday’s inflation update news arose that the US economy suffered slower growth in the first quarters than was previously predicted. It expanded by 1.3% – when the initial prediction was 1.6% – and was much slower than the 3.4% pace in the last 3 months of 2023. However, there were indications that consumer spending was moderating and weekly jobless claims were higher than predicted. This news fuelled optimism that the Fed was succeeding in their efforts to cool the economy and remain on track to cut their interest rates at least once by the end of the year.

The Personal Consumption Expenditures Index – the Fed’s preferred measure of inflation – tracked sideways in April as prices increased by 2.7% in the 12 months leading up to April, which matched the gains in March. There was some relief that the inflation reading wasn’t as inflammatory as initially thought, but the status quo report didn’t reveal much as to whether the Fed is going hold back for longer or cut their interest rates soon.

Halfway through – time for an assessment

The leading US stock indices broke their five-week success streak as investors processed the news regarding inflation. The S&P 500 ended May with a rise of 10.6% year-to-date.

As we get to the mid-year point, the markets are in unusual territory in terms of the volatility that is at the core of investing. The only dip so far this year was the small April pushback. In the last 40 years, there’s only been four years that have had a smaller intra-year decline. Even though there’s an increasing list of challenges, from more-difficult-than-expected inflation and big delays in rate cut expectations to increasing geopolitical tensions, particularly in the Middle East.

Investors need to hold onto the fact that the best markets experience temporary setbacks. There is always market uncertainty when elections and central bank actions are announced and this can cause weakness over parts of the year. The best advice is always to sit back and wait.

Eurozone inflation, but is it all bad news?

Eurozone inflation revealed that German inflation increased slightly more than was initially predicted in May. But economists were quick to emphasise that these figures were not cause for worry for the European Central Bank. The outlook for the biggest economy in Europe is looking much brighter after the severance of Russian energy imports. Despite this, the rate of recovery is still very slow.

The rest of the eurozone inflation followed a similar pattern to Germany and recorded a larger than expected rise in May. The annual figure stands at 2.6% and, in comparison to the 2.4% in the previous two months, it goes to emphasise the difficulties faced by the European Central Bank. However, these statistics are not likely to prevent the ECB from lowering borrowing costs this week. But it did seem to consecrate the case for a pause to take place in July.

Inflation needed in Japan

Japan would welcome a bit of inflation after battling a lot of deflation, having held interest rates close to zero for nearly thirty years. On Monday, a conference was hosted by the Bank of Japan (BoJ) where the governor reinforced that the central bank would be proceeding with caution when it came to its inflation-targeting plans. However, they did note that the expectations of achieving a 2% target would be “a big challenge”.

The BoJ faces a unique and difficult task of assessing what level of interest rates would be considered neutral for their economy when they’ve been oddly low for such a long period of time. Markets are currently anticipating an interest rate increase to at least 0.2% by the end of the year.

Wealth Check

Working together to reduce your Capital Gains Tax bill

Are you thinking of selling your second property? Or maybe cashing in a share portfolio? It’s important to know that when you sell an asset that’s increased in value since you purchased it, you may have to pay Capital Gains Tax (CGT) on your profits.

One of the ways in which you can reduce this tax bill is to give an asset away to your spouse or civil partner, or split it with them. Through this, you can use your individual CGT allowance and still reduce the amount of tax payable. These kinds of transfers are done on an outright and unconditional basis.

Who’s liable to pay Capital Gains Tax?

CGT is the tax that’s payable on the profits or gains that you make when you sell an asset that’s risen in value since you first bought it. It’s only the profit that you make on the asset that’s taxable. You may have to pay CGT if you decide to sell or gift assets where the overall profit made exceeds the annual CGT allowance.

Shares that aren’t part of an ISA or pension (both schemes are CGT exempt), business assets, personal possessions that are worth more than £3,000 and property that isn’t your main home (can include a second home, a buy-to-let property or an occasionally occupied house or room) are all assets that you may have to pay CGT on.

How much Capital Gains Tax will you need to pay?

If you’re a basic-rate taxpayer and remain as one after the gain is added to your income, you’ll need to pay 18% CGT for residential property and 10% if you’re clearing out other assets.

Explaining Capital Gains Tax allowance

For 2024/25, the CGT is £3,000 per individual. If you’re living with a spouse or civil partner, each of you has a £3,000 tax-free annual allowance. £3,000 is the maximum profit you can make on the sale of chargeable assets this tax year before you’re liable to pay CGT.

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.

The Last Word

“As the leaders of political parties, as all those who occupy positions of responsibility in society, we have heard the voices of our people and we must respect their wishes.”

Cyril Ramaphosa, President of South Africa, reacts to his party losing its parliamentary majority for the first time since apartheid ended 30 years ago.

The information contained is correct as at the date of the article. 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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SJP approved: 03/06/2024