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The Thinking Behind a Rate Rise?

17 Oct 2017

Jack Turner, Research Analyst

Here 7IM offers its view of the potential rate rise by the Bank of England, focuses in on the case for Frontier markets and provides three economic updates for last week. We also flag three things being published this week.

The Thinking Behind a Rate Rise?

Based on comments from the Bank of England, the markets expect a rate rise at its 2 November meeting. But despite the advice against a rise due to the state of the economy and having never raised rates before when GDP growth was less than 0.5%, the Bank looks set to act. An explanation may lie in the recent increase in consumer debt levels and that household savings have fallen to historically low levels. A rate rise may stop households burdening themselves with more debt, which could become unaffordable if rates return to normal.


NEWS

UK DATA MIXED
The National Institute of Economic and Social Research increased its UK growth estimate for Q3 2017 from 0.3% to 0.4% due to a better-than-expected performance from both the manufacturing and construction sectors. However, this data is at odds with the UK’s IHS Markit/ CIPS purchasing managers' indexes (PMI). The PMI for the construction sector contracted for the first time in 13 months, falling to 48.1 in September, which given it’s below the 50 mark denotes that the sector is contracting. Activity in the manufacturing sector also slowed slightly, with the PMI sliding to 55.9 versus 56.7 in August.

EU STARTS PREPARATIONS FOR BREXIT TRADE TALKS
While a deal on the ‘divorce settlement’ has not yet been decided, the EU has signalled that it still is beginning to prepareand agree its positions among the 27 remaining members for trade talks. While any initial terms will remain in draft and can be changed, it is understood that initial conclusions would be put to EU leaders on Friday 20 October. Discussions on the trade deal would then begin in December. However, that timeline could easily be put back given the current deadlock on negotiations to date. The UK government is also under pressure to publish advice it has received with regard to the economic impact on specific UK sectors and whether Article 50 could be revoked.

US INFLATION A CONCERN
Usually inflation becomes a concern for central banks when it’s high, but minutes of the Federal Reserve’s September meeting indicated that the sustained low level of inflation was also a concern for policymakers. The report flagged that the disquiet stemmed from the low inflation readings this year and that might not only reflect transitory factors, but also developments that could prove more persistent. Low unemployment, rising wage packets and increased spending usually lead to increased inflation. However, most policymakers remain in favour of another rate rise, probably in December.


PORTFOLIO ACTIONS
Two weeks ago we discussed the changes we made to our equity holdings, highlighting our investments in Frontier Markets. Our case for these investments is clear given we believe:

  • It’s a broad, diverse, universe of stocks that have the opportunity to benefit from economic, political or physical structural changes
  • There’s better growth potential than for peers in developed markets due to the nature of their underlying economies
  • Price inefficiencies still persist in these markets
  • Local investors have an advantage over large, global players and 7IM can access these without creating issues for market liquidity
  • These markets tend to be less likely to move in the same direction as developed markets, offering up diversification benefits for global portfolios.

THREE ANNOUNCEMENTS DUE THIS WEEK
18 Oct –UK Unemployment // 18 Oct –Various European Central Banker Speeches // 20 Oct –US Existing Home Sales

SOURCES: BANK OF ENGLAND, 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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