This week we look at the Bank of England’s last monetary policy committee decisions, the squeeze on UK wages, the Eurozone’s industrial production and US inflation. We also provide an update of our latest portfolio changes.
SEVEN TO ONE DECISION
The Bank of England voted 7-1 to keep base rates on hold at 0.25% at its latest Monetary Policy Committee meeting – in line with a belief that the bank is looking through current inflation levels to focus on GDP. Its 2016 growth forecast now sees slightly lower expectations of 1.9%, down from its previous 2.0% forecast, but up from 2016’s 1.8%. And while inflation may reach 2.7% this quarter, up from the 2.4% rate it was forecasting in February and peak in Q3 at of just below 3% (again at a slightly higher level), the bank believes that inflation will fall back in 2018 and does not want to damage growth prospects given the uncertainty that Brexit negotiations brings.
UK WAGE SQUEEZE
The Bank of England’s view that households are set to suffer, with inflation outpacing wage growth, was confirmed by a Chartered Institute of Personnel and Development survey that believes wages will rise by an average of 1% this year despite inflation currently coming in at 2.3%. Brexit uncertainly is the main reason for the reluctance by employers to pay people more, and the figure is at its lowest level for three years, down from the 1.5% view by the same survey just three months ago. There was some good news though in that employment confidence remains positive, with the manufacturing and production sectors in particular proving buoyant.
EUROZONE INDUSTRIAL PRODUCTION DOWN AGAIN
Q1 2017’s warm weather meant Eurozone energy production dropped significantly, causing the region’s industrial production to fall by -0.1% month-on-month in March, following the 0.3% drop in February, versus consensus expectations of +0.3%. However, a rebound in Q2 is expected given that businesses are indicating that order books have been filling up quickly and the backlogs of work are on the rise. The trend is confirmed when quarter-on-quarter growth was recorded at 0.5%, while year-on-year growth was 1.9% in March.
US INFLATION DROPS
Annualised US inflation fell back to 2.2% from the 2.4% recorded for March as consumer prices (excluding food and energy) rose by less than expected and wireless telephone services prices declined for a second month. While higher energy prices (up 9.3% from last year) continued to boost headline inflation and increasing shelter (i.e. rent) costs offset declines in a number of other core components for the month. Year-over-year, core inflation also slipped to an 18 month low of 1.9%. However, the lower numbers did not temper expectations for a June Federal Reserve rate rise.
7IM added a third infrastructure fund to its Personal Injury, Cautious and Unconstrained Funds last week. The investment in INPP adds to allocations in HICL Infrastructure and BBGI and marks a return to the sector after a five year absence, having originally invested in the sector from its outset in 2007. While bonds have delivered good returns in recent years, cautious investors face issues in a low interest rate environment when bond income isn’t there. For us, infrastructure investment companies can be part of a solution as they can still offer interesting returns while limiting overall portfolio volatility. We like the long term, steady cash flows that they can offer, as well as the high degree of inflation linking, low economic market sensitivity, and their backing by the public sector. Recent fund-raisings in the sector also provided us with good entry points.
THREE ANNOUNCEMENTS DUE THIS WEEK
17 May – Eurozone Inflation Rate // 17 May – UK Unemployment Rate // 18 May – US Jobless Claims
SOURCES: BANK OF ENGLAND, BLOOMBERG, 7IM
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