Monthly Returns

Inflation Increases Again

Jack Turner, Research Analyst

This week we cover off inflation, the value of Sterling and how we’re protecting our portfolios. We also provide three updates on economic news out of the UK, Eurozone and the US, and flag three news items due this week.

Inflation Increases Again

The headline CPI number published today showed that inflation remained steady at 3.0%. 7IM believes that inflation is near its peak given Sterling’s weakness is dropping out of the year-on-year economic statistical calculations, which would leave inflation falling over the next year or so. However, any boost that this would provide to people’s incomes could be offset by further action due to the Bank of England’s keenness to clampdown on excess credit growth.


NEWS

UK UPDATE
The National Institute of Economic and Social Research predicted that the UK economy had grown 0.5% in the three months to October, helped by stronger global growth and a weak Sterling. Meanwhile, according to the Office for National Statistics, UK industrial output grew 0.7% month-on-month in September, its fastest pace so far this year, primarily on the back of “robust growth” in car and medical equipment production. Manufacturing output also rose by 0.7% in September, marking an increase for the sixth consecutive month. Construction output though fell by 1.6% in the month.

EU UPDATE
The Council of Economic Experts has warned that Germany’s economy is in danger of overheating. In particular, it warned that low interest rates and above-trend growth was raising the level of risk to the country’s financial system, and that conditions threatened to create a bubble in property prices. The group of advisers also urged the European Central Bank to end its bond-buying program earlier than planned and consider raising interest rates and stated that given the risks to the German economy, that Brexit would be better avoided.

US UPDATE
The University of Michigan’s survey of consumer sentiment slipped to 97.8 in November, down from 100.7 in October, although that number is up from the 93.8 in November 2016. The number is also the second highest for the year. However, the number also seems to indicate that the persistent strength in the labour market is finally prompting higher inflation numbers to come through on the back of wage inflation. And while December’s expected Fed rate hikes seem to be the right action according to most onlookers, a critical issue remains as to whether income gains will be sufficient to outweigh rate hikes in home and vehicle purchase decisions.


PORTFOLIO ACTIONS
7IM continues to monitor the value of Sterling as fears over the stability of Theresa May’s government and fresh difficulties during the Brexit negotiations led to falls in the value of the Pound over the last few days. 7IM’s foreign currency holdings, which are broadly allocated across Euros, US Dollars and Yen, as well as a basket of other unpegged currencies, however, supported portfolios.

Meanwhile, worries over Brexit and given our wider concerns about excessive valuations have led us to move away from Gilts and look at alternative sources of income. One of these alternative investments is the F&C Equity Market Neutral Fund, which attempts to extract equity risk premia without taking wider market risk. The fund has returned nearly 10% since the end of June..


THREE ANNOUNCEMENTS DUE THIS WEEK
15 Nov –UK Unemployment Claims // 15 Nov –US Core Inflation Rate // 16 Nov –French Unemployment Rate

SOURCES: BLOOMBERG; EUROSTATS; MARKIT; 7IM.

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