This week we look into the main drivers behind the inflation numbers and three pieces of key data published last week. We flag three news headlines due this week and provide a 7IM portfolio update.
Five and a half years ago, inflation was on the way down. In April 2012, it was down to 3.0% year-on-year from the 3.5% year-on-year figure published in March 2012. The latest figure showed an increase from the 2.9% seen in August and was mainly driven by an increase in food and motor fuel prices which have been disproportionally impacted by the fall in Sterling. Domestically-generated inflation has remained stable; Inflation in the services sector was just 2.7% in September, well below its 3.7% average since the Financial Crisis.
UK retail sales fell by 0.8% in September meaning the growth in volumes was up just 1.5% over the third quarter of the year. Many economists have been quick to explain that the slowdown is due to consumers’ incomes being squeezed by rising inflation and slowing wage growth. The Bank Of England (BoE) now has a tough call to make on whether to increase rates in November. It has stated previously that it could increase rates over the coming months as concerns increase over growing household debt levels. If the BoE does choose to increase rates, it will be the first time in ten years that the Central Bank has done so.
Inflation in the Eurozone was unchanged at 1.5% year-over-year in September, in line with the consensus and initial estimate. Core inflation dipped to 1.1%, from 1.2% in August, also in line with the first estimate and consensus. The headline rate was pushed up by food inflation but was constrained by a dip in services prices. The figures will unlikely change the viewpoint of the European Central Bank (ECB) who are expected to announce the tapering of its ultra loose monetary policy on 26 October.
The passage of the budget resolution in the US increased the odds of pro growth tax reform being passed by the Trump administration. The budget allows for a $1.5 trillion increase in the deficit over the coming ten years and includes no key mandatory cuts in spending or increases in defence spending. The proposed tax reform could be the biggest change to the US tax code since the 1980s and would provide an extra boost to GDP. It would be a big win for Trump’s administration and provide the GOP with a much needed boost before the mid terms next year.
7IM’s holding in Japanese equity has been performing well in October seeing growth of over 4% since the start of the month. The increase has been driven by an improving domestic economy and President Abe’s improving political fortunes. Markets became concerned when there was a brief flurry of support for the current Tokyo Governor Yuriko Koike which could have challenged Abe’s campaign in the national elections. Support for Koike weakened however and on 22 October Abe’s LDP coalition achieved a landslide victory, winning two-thirds of the vote to gain a ‘super majority’. The market expects the business friendly policies or ‘Abenomics’ to continue now that the LDP is in a position of strength. We currently have a 6% holding in our Balanced portfolio after we increased our weighting following the last Tactical Asset Allocation process.
THREE ANNOUNCEMENTS DUE THIS WEEK
25 Oct –UK Q3 2017 Preliminary GDP Forecast // 25 Oct –US New Home Sales // 26 Oct –ECB Interest Rate Decision
SOURCES: BLOOMBERG, PANTHEON MACRO, 7IM
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