The latest weekly review from 7IM highlights the recent news out of the Bank of England, it's impact on Sterling and how 7IM portfolios have been protected. We also review other key economic data and look flag at three key dates for data this week.
The Bank of England’s nine-strong Monetary Policy Committee voted by seven members to two to keep interest rates on hold at 0.25%, before adding that higher inflation and a pick up in growth could lead to a rate hike in “the coming months”. The strongest language yet, that interest rates could rise from 200-year record lows, was used by Bank Governor Mark Carney when he stated: “the balancing act is beginning to shift, and that in order to... return inflation to that 2% target in a sustainable manner, there may need to be some adjustment of interest rates in the coming months.”
UK INFLATION PICK UP
UK inflation, as measured by the Consumer Prices Index, rose to 2.9% in August, up from 2.6% in July, primarily due to higher clothing and footwear prices (climbing 4.6% year-on-year) and petrol prices (up 2p a litre). Meanwhile the Bank of England, for the first time since the Brexit vote, stated that they can see price increases pushing beyond the 3% level. Previously they had not believed that prices would increase more than 3% and seem to be responding accordingly. The market is now therefore pricing in 64% chance of a hike in November. Meanwhile, although UK unemployment fell to a 42 year low of 4.3% in July, wage growth remains at 2.1%, and again below the level of inflation. Household incomes in the UK therefore continue to shrink in real terms.
CHINA FIGURES DISAPPOINT
In China, retail sales, fixed-asset investment and industrial production all missed expectations in August. Retail sales slowed slightly, growing 10.1% on a year-on-year basis compared to 10.4% rise in July. And while industrial production grew by 6.0% in August, that too was down from its 6.4% expansion in July and marks its slowest rate of growth since January. Fixed asset investment held steady at 8.3%.
US HEADLINE INFLATION INCREASE
US consumer prices rose 0.4% in August, the largest monthly gain since January on the back of rising petrol pump prices following Hurricane Harvey, which hit the refinery-rich stretch of the Gulf Coast and so ended five consecutive months of relatively weak data. This took the year-on-year price increase to 1.9% versus 1.7% in July. Core consumer prices, which exclude food and energy, gained 0.2% over August, but the year-on-year increase stayed at 1.7% for the fourth month in a row.
The Bank’s statement of “Monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations…” was taken by the market as rejection of views that interest rate rises could be further out than a year. These ‘hawkish’ comments led to an increase in the value of Sterling as it rose to levels not seen since the initial drop following the Vote to Leave. 7IM was able to benefit from the currency option it has, which we added to offer protection from the negative impact an increase in Sterling could have on the foreign currency holdings in the portfolios. The option has a strike price at US$1.35 to £1 and was up 90% over the week in response to Sterling moving from US$1.32 to US$1.36. The investment would have also benefited from an increase in the currency’s volatility, triggered by the pace of the rise.
THREE ANNOUNCEMENTS DUE THIS WEEK
20 Sep – US Interest Rate Decision // 21 Sep – Eurozone Consumer Confidence // 22 Sep– PM May’s Brexit Speech
SOURCES: BANK OF ENGLAND, BLOOMBERG, REUTERS, 7IM
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