WeeklyWatch – Inflation & interest rate cuts – what to do?

16^th July 2024

Stock Take

US still guessing – no clear stance on interest rate cuts

Over the course of the year, intrigue in the timings of interest rate cuts has been high. It was the same case last week, where investors were left pondering when policymakers will feel that they’ve reached a controllable point with inflation levels to enable an interest rate cut to take place.

The attention was on the US Federal Reserve Chair, Jerome Powell, as he delivered his two-day testimony in front of Congress. He emphasised that he didn’t want to give any definitive indications as to the timing of future interest rate changes and told lawmakers the nation was “no longer an overheated economy” with a job market that “appears to be fully back in balance”.

Does the US data match the sentiment?

Powell’s words resonated with the data released on Thursday, which suggested that the Fed is in its final round in the fight against inflation. The US Labor Department stated that in June the US cooled to its slowest pace in a year, making it the third month in a row where inflation fell. There was a 0.1% drop in prices between May and June – the first outright monthly decline in years – to register an annual rise of 3%.

These reports furthered the belief that the Fed would now be on track to make an interest rate cut in September, which consequently encouraged the benchmark MSCI global stock index to hit another record high.

In addition, leading US stock indices recorded new highs; however, they were slightly knocked back by an underwhelming beginning to the second-quarter earnings season. Some of the biggest banks in the nation fell well below par, and huge food company Pepsi-Co was just one of a number of businesses that warned that households were cutting back – a red flag for the US economy, which is highly dependent on consumer spending.

Chief Investment Officer at BlueBay Mark Dowding believes that it’s unlikely that inflation will fall much more across the next two months and will stay higher than the Fed would like. He stated:

“Given the risk of possible upside inflation disappointment, a September ease is not a completely forgone conclusion, and we have seen over the past year when markets have made a mistake in seeking to front-run rate cut expectations too much.”

British summertime and finances in no danger of overheating

Overheating is certainly not a current concern for the UK. As chilly weather in June continued to be the hallmark of British summertime, consumer spending contracted with shoppers opting to keep their credit and debit cards tucked away like the public sheltering from the rain.

Barclays revealed that for the first time in two years, supermarket spending had fallen. These reports resonated with recent business surveys and other indications of slow growth, emphasising the large challenge that the new Labour government now face as they set about trying to improve economic growth – one of their biggest electoral initiatives.

Having said this, the news was followed up by reports from the Office for National Statistics wherein the UK economy was said to have expanded by a quicker-than-expected 0.4% in May, a result of improved performance from retail and construction industries. It’s unwise to give too much weight to one month’s data, and economists took a more sceptical stance in their suggestion that this news reduced the chances of the Bank of England’s (BoE) Monetary Policy Committee cutting interest rates when they meet on 1^st August.

Two BoE officials also made cynical statements regarding the expectation of an interest rate cut in August. The Chief Economist at BoE, Huw Pill, flagged “uncomfortable strength” in services inflation and wage growth and mentioned that the June inflation numbers weren’t likely to change a great deal. Outgoing MPC member Jonathan Haskel echoed Pill’s sentiments by stating that he wasn’t ready to vote on interest rate cuts. Consequently, investors curbed their hopes for an interest rate cut next month and instead priced in a 50% chance rather than their previous 62% prior to Pill’s comments.

Invigorated European markets

Stimulated off the back of US inflation numbers, there was a widespread feeling of optimism across the European markets. The benchmark STOXX 600 index posted a new record high point and, for the first time since May, celebrated a second straight week of gains.

Global election drama causes more investor anxiety

But a survey carried out at the beginning of the week revealed a fall in eurozone investor morale, which ended an eight-month streak of improvements. Investors conveyed strong concern over the French elections, upcoming German state elections and more uncertainty surrounding the US presidential election that’ll take place later this year.

Market reaction to the French election outcome was quiet, but the risk of policy gridlock has the potential to make it more difficult to better the stretched finances of Europe’s third-largest economy and has caused a fair few to reflect back on previous eurozone crises. Plus, reports that German exports fell by more than was expected in May did nothing to improve optimism.

The weekend quickly became uneasy at the news of an assassination attempt on former US President Donald Trump when he attended an election rally in Pennsylvania – narrowly missing Trump but killing one bystander and injuring several others. Soon after the shooting took place, investors were quick to suggest that the incident was likely to improve Trump’s chances of winning the Presidential race.

Is the UK the hope for investors?

As both political and trade uncertainty rocks the US and multiple areas in Europe, investors have now got their eye on the long-shunned UK market as a potential saving grace. This is aided by the prospect of relatively predictable policy and indications that the economy is starting to improve. In UK stocks, there have been 44 straight months of net outflows and the FTSE 100 trades at a near 50% discount to the S&P 500 index.

However, investors have cautioned that the honeymoon period could be short-lived; it’s all dependent on whether Prime Minister Keir Starmer is able to put a plan in place that will enhance living standards without causing more strife to the UK’s finances.

BlueBay is a fund manager for St. James’s Place.

Wealth Check

The great feeling of milestones

We all remember milestone moments: when you met your life partner, taking your newborn baby home or receiving the keys to your first property. And what about when you finally pay off your mortgage? A momentous life event!

When you’re free of mortgage payments, the feeling is incredible. A mortgage is the biggest debt that a person will ever face, and it can take over 25 years to pay off. This means that decades of putting money aside, comparing interest rates and shopping for the correct mortgage all need to be factored into the plan when buying a property.

If your finances change at any stage (especially if it’s a positive change), it’s important to make the time to talk these through in a review with a financial adviser.

Putting that little bit extra aside

It’s usually the case that paying off a mortgage overlaps with other key life stages. You could be fast approaching the peak of your earning capabilities or enjoying a larger salary or bonus. Day-to-day living expenses could be diminishing as kids leave the family home. Also, you may inherit a lump sum of money through inheritance or see the maturing of a savings account.

An extra couple of hundred pounds each month can seem modest at first; it doesn’t exactly match up with the level of a lottery win. It’s therefore easy to ‘absorb’ these amounts into the household budget or cover an extra lunch out. However, that money can hold a surprising amount of power if it’s saved over a longer period of time. It’ll be almost unnoticeable if you’re paying the same amount for your mortgage.

Mortgage planning in later life living

If you’re not thinking about stopping work soon, it’s still a good idea to think ahead to your retirement. As we’re part of an ageing population, the extra money could make a huge difference to your quality and comfort of later life.

For example, if your mortgage is paid off when you reach 57 and you continue to work until you’re 67, you can invest the money on your mortgage repayments over that decade. You’ll be reaping the benefits of compounding – ‘growth on top of growth’. This means that your investment could have a boosted couple of years by the time you’re ready to finish work and retire.

So, while being in the position to pay off your mortgage can feel like a gift to yourself, be mindful that this increased disposable income is also a golden opportunity to reset and review your retirement plans.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The Last Word

“We probably didn’t play our best game, but there were definitely some good moments and we felt like we got back into the game, and then to kind of be sucker-punched with the late goal… it’s heartbreaking.”

– Jude Bellingham, England midfielder, reacts to England losing 2–1 to Spain in the Euro 2024 final.

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SJP approved 15/07/2024