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Oil Price Prompts Inflation

22 May 2018

Jack Turner, Research Analyst

This week we cover the hike in oil price over the last year, three pieces of economic-related news out of Italy, the UK and the US. We also highlight some changes in the portfolio that the team are making.

Oil Price Prompts Inflation

The increase in price of crude oil by 45% over the past year looks set to continue as the cost per barrel for Brent crude oil hit US$80 –a four year high price level. This latest high is also set to be overtaken given the new round of sanctions being levied on Iran by the US, and since Venezuela’s energy sector is suffering from the country’s economic malaise. With every US$10 increase in oil, core inflation in the US rises by about 0.1%, given the heavy use of cars. US drivers have seen the price they pay at the pumps rise from around US$2.30 a year ago to over US$3.00 today.


NEWS

UK
After two quarters of improvement in the second half of 2017, UK productivity growth fell by 0.5% during Q1 2018 as hours worked rose without a matched increase in economic growth. Without the productivity increases, employers could struggle to push earnings higher, which are currently rising at 2.9% and beating inflation which stands at 2.5%. However, given that GDP growth for Q1 is expected to be revised higher over the next few weeks, there are similar expectations that the fall in productivity growth could be revised to a smaller drop. The weather was also a factor, given the snow in March prevented some employees getting to and carrying out work.

ITALY
The anti-establishment 5Star Movement and far-right Northern League parties have agreed to form a coalition government. Banks were among the weakest performers on the stockmarket amid reports that the new coalition planned to tighten the ways in which lenders can recover debt from retail borrowers. Other discussions likely to take place include the creation of a mechanism by which Italy could leave the currency union, and a demand to the European Central Bank to cancel €250bn of the country’s debt. The parties also plan to unwind recent pension reforms.

US
Headline US retail sales rose by 0.3% in April, matching consensus expectations. Meanwhile data for the March reading was revised upwards to 0.8% from 0.6%. The lower growth was blamed on the rising price of fuel at the pumps and on delays in processing the tax refunds, while it is claimed that the clean-up after the back-to-back hurricanes that hit in Q4 2017 brought forward some discretionary spending that would otherwise have taken place in Q1. Further increases in the price of ‘gasoline’ could lead to further disappointment in the data that will blunt the impact of lower taxes.


PORTFOLIO ACTIONS

The 7IM Investment Team is in the process of switching its US Treasury holdings to a broad global government bond index tracker. This more diversified fund will be used on conjunction with a bespoke basket of bonds sourced directly by the team. The new tracker fund provides two main benefits: it is easier for us to change our tactical asset allocations, managing the positions we want to hold versus our longer term strategic asset allocation; and it provides greater diversification given the current exposure to the US is 27% versus 100% previously. The diversification also means we are able to tap into other assets that are seen as ‘safe havens’ (such as Japanese bonds), and allows us to change duration and regional allocation , while maintaining our current currency exposure. The fund is also a cost effective approach to managing our government bond exposure.


THREE ANNOUNCEMENTS DUE THIS WEEK

23 May – UK Inflation Rate (Apr) // 23 May – US New Home Sales (Apr) // 23 May – EU Consumer Confidence (May)

SOURCES: BLOOMBERG, ONS, 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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