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Is UK inflation set to bite?

14 Aug 2017

Jack Turner, Research Analyst

The latest update covers off UK inflation, the threat of WWIII ad how that’s affected 7IM’s gold investments, as well as providing an update of three things that took place last week and three things that will get published next week.

INFLATION SET TO BITE?

INFLATION SET TO BITE? 

New research from the Chartered Institute of Personnel and Development suggests that despite the UK’s tight labour market, wage growth will remain sluggish with only 1% pay rises due in the future. Meanwhile, inflation is set to move higher than the current 2.6% during the Autumn, a view the Bank of England endorses, with food prices expected to be particularly volatile. This squeeze on real incomes will represent a win for the low cost supermarkets who continue to take market share from the main four.


NEWS
US INFLATION REMAINS TAME

The US LaborDepartment's Consumer Price Index (CPI) edged up by 0.1% in July to 1.7%, just slight ahead of June’s 1.6% number. Consensus expectations had anticipated a month-on-monthincrease of 0.2%. The news led the US Dollar to fall further given it pushes expectations of a further Federal Reserve (Fed) base rate rise out further although the central bank is still expected to squeeze in one more rate hike this year having risen rates twice in the first half of 2017. The Fed has a inflation target of 2%, although the core inflation measure that it tracks currently stands at 1.5%, which is the same level as in June.

GERMAN TRADE DATA DISAPPOINTS
Germany reported that June’s export levels fell by 2.8%, calling a halt to a five-month run of growth. Imports also shrank by 4.5% for the month, which represents the biggest drop since January 2009. Consensus opinions had expected exports to dip by 0.3%, and imports to rise by 0.2%. The news means that German’s trade surplus rose to €21.1bn, prompting concerns that Trump rhetoric could follow. The economy is however still growing despite this news and the release of reports showing that industrial output had fallen 1.1% month-on-month. Q2 GDP growth estimates are coming in at 0.8%.

JAPAN’S ECONOMIC GROWTH QUICKENS
Japan's economy grew at its fastest pace for more than two years in Q2 2017 as consumer spending and capital expenditure ramped up and compensated for the drop in exports versus Q1. GDP rose at a 4% annualised rate for the quarter, beating the 2.5% consensus expectations and well ahead of the 1% Q1 growth. The figure translates into the economy's longest expansion in a decade since it’s the sixth consecutive quarter of expansion. Meanwhile, inflation stands at 0.4%, still significantly below the Bank of Japan's 2% target.


PORTFOLIO ACTIONS
Threats of "fire and fury" by President Trump and missiles landing near Guam by Kim Jong-Un (the US military bases occupy some 30% of the island) led investors to seek shelter in gold as globally stockmarkets retreated. As a result, the price of gold rallied to US$1,286 an ounce amid the rising geo-political tensions. China’s announcement that it would sit on the fence in the event of any conflict also fuelled concerns. The belief that Trump could trade threats with the North Koreans for a raft of sanctions on China in order to save face if he is forced to back down from his belligerent stance. Across the risk profiles, 7IM holds gold in our portfolios at a weight of between 6% and 8%. We believe that the asset will continue to be worth its weight in the months to come since it also benefits from the weak US Dollar and lower bond yields.


THREE ANNOUNCEMENTS DUE THIS WEEK
16 Aug –UK Unemployment Rate // 16 Aug –US Federal Reserve Meeting Minutes // 16 Aug –Eurozone Q2 GDP

SOURCES: KANTOR, BLOOMBERG, REUTERS, 7IM

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The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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