There was relatively light trading last week, with volumes about 20% lower than the 30-day moving average. With many institutional managers still out of the office the focus firmly remained on central banks, and the Fed in particular. As we highlighted last week inflation and interest rates are still a long way apart across many key economies. We’ll see the Fed move again in September, with either a move higher of 50bps or 75bps. Whilst the minutes of the July meeting did not shift markets massively last week there were insightful comments from FOMC members, George, Kashkari, and Bullard. Perhaps the most interesting were from Kashkari, who usually holds a more ‘dovish’ stance. The Minneapolis Fed President commented ‘We need to get inflation down urgently. We need to get demand down’.
Inflation in some markets may have peaked over the summer, but with the credibility of central bankers on the line, it is not the time for equity investors to become complacent. The Jackson Hole symposium is likely to provide further food for thought. Within our active top-down investment process, our ubiquitous economic cycle graphic highlights the importance of inflation, economic growth, and interest rates. This remains a focus for us today as it has done for over 30 years.
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Weekly Investment News
Stocks finished the week lower and gave back some of the previous week’s strong gains as commentary from several Fed officials struck a ‘hawkish’ tone. More growth orientated sectors were hit hardest. Economic data released last week was broadly positive. US retail sales for July proved to be surprisingly resilient as core sales rose on an inflation adjusted basis. Weekly jobless claims continue to tick lower, further supporting the concept that the labour market remains strong. Whilst the housing market (where the effects of higher rates are almost instantaneous) continues to weaken the strong underlying economic data does little to dispel the view that the Fed will have to continue to hike rates to curb consumer demand.
In the UK, headline inflation hit 10.1% in July, which is the first reading above 10% since the early 1980s. The Bank of England has revised its Q4 inflation forecast up to 13% with another three interest rate increases forecast by the market before the end of the year. In the eurozone, inflation hit a record 8.9% in July. Both UK gilts and eurozone bonds sold off on the inflation data and comments from the ECB’s Isabel Schnabel stating that inflation could tick higher in the short term. The UK yield curve is now showing the large inversion between 2yr and 10yr bonds since 2008. In Japan, GDP growth for Q2 came in at 2.2% versus a consensus forecast of 2.5%. Industrial production proved to be more positive, with the June figure coming in at 9.2% versus an estimated 8.9%.
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