The week has been full of news, however, you’d be forgiven if you had missed it as the most covered topic this week has been the proceedings following Queen Elizabeth’s death. Queues to see the Queen’s coffin have hit five miles in length, causing a pause to new entrants.
There is a feeling of déjà vu as we once again begin the weekly round-up discussing inflation. There have been other events going on this year, including Russia invading Ukraine, but by far the biggest focus for investors has been inflation and it has been the dominant driver of asset prices this year, and this week has been no different.
The release of US inflation data sent markets into a tailspin on Tuesday. The figure of 8.3% (year-on-year) was lower than the previous two months, which may help confirm that inflation has peaked, yet it was still higher than the market expected. More importantly, month-on-month inflation remained sticky, nudging up when it was predicted to decline. Digging into the data, one of the biggest drivers of inflation is now shelter/owners equivalent rent. This represents a large portion of the inflation basket and continues to surprise to the upside with year-on-year increases of 6.3% – the highest since 1986. The market reaction to the news was extreme with the US S&P 500 suffering its worst day since June 2020. Bond yields also spiked (prices dropped) as investors priced in yet more US interest rate rises – now expected to reach 4.3% by April 2023. Volatility, particularly in equities has continued throughout the week, with recent gains earlier in September being fully eroded.
Switching to the UK, but staying with inflation, a reading of 9.9% (year-on-year) was slightly lower than expected but still extremely high. Food price inflation rose for a 13th straight month; however petrol prices fell during August, with an average drop of 14p per litre over the month. With energy prices going up in October inflation is likely to increase from here, although the recently announced energy cap should help to limit the increase. The total bill for the energy support package is estimated to be £150bn. The Bank of England is still expected to continue to raise interest rates at their next meeting, due to take place next week, after being postponed due to the Queen’s passing. Disappointing UK GDP data on Monday and weak UK retail sales on Friday resulted in sterling falling against the USD, plummeting to 37-year lows. There was a bright spot within the UK labour market with the unemployment rate falling to 3.6%, the lowest level since 1974.
Russia President Putin met with Chinese Leader Xi Jingping on Thursday, their first face-to-face meeting since Russia invaded Ukraine. With tensions with the West elevated, this meeting took on added significance. Interestingly Putin highlighted that China may have concerns with their invasion of Ukraine.
Chinese exporters are warning of hard times to come as softer global demand is forcing them to cut workers, shift to lower quality goods and even rent out factories. Industries such as machinery parts and textiles have been hit the hardest, seeing orders dry up. Chinese exports are more vital to China than ever accounting for 30-40% of GDP growth this year, with other pillars of its economy on shaky ground (real estate). In order to support the sector export tax rebates have been expanded and regulation for the efficiency of port operations and logistics have been put into place.
In edgy market conditions such as these the long-term investor is advised to take a step back and consider the opportunity set. Some of the most uncomfortable times are when the best returns can be made. We at RJB, continue to stay committed to this process.
Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.