Many of our readers will have likely noticed the recently rising prices at the petrol pumps. The impact of increasing oil prices in recent months fed through into UK inflation data this week, where headline inflation remained at 6.7%. While this is still the lowest level of inflation since February 2022, it was higher than expected, which was in part driven by oil prices, that have recently marched up to nearly $100 a barrel.
The UK’s inflation rate does remain an outlier when compared to most other developed market countries (USA, Germany, France), with energy and services once again leading the charge. The services sector includes rent prices, and this has consistently been a leading contributor to inflation. The Bank of England (BoE) paused on interest rate hikes at their last meeting, buying themselves time to assess the impact higher rates are having. Slightly higher inflation may encourage the BoE to hike rates in November, although it is still expected that inflation rates will fall as we head towards the end of the year.
UK wage growth data was released on Tuesday at 7.8% (excluding bonuses), meaning wages are growing at a faster rate than inflation for the first time since 2021. Chancellor, Jeremy Hunt, was very proud of this stating “It’s good to see inflation falling and real wages growing, so people have more money in their pockets”. However, future expectations for wage growth could see a slowdown as UK companies are becoming more reluctant to hire new staff; there was a slowdown in job vacancies to 43,000 in September hinting at a declining jobs market.
US Retail sales for the month of September was up 0.7% (month-on-month), smashing the market expectation of 0.3% as US households stepped up the purchases of motor vehicles and spent more at restaurants and bars. Any talks of a potential US recession is certainly over for now as the economy continues to show its strength. Despite the strong data, investors are more confident the US Fed will avoid another interest rate hike in their November meeting. The question remains, is the economy getting used to interest rates being “higher for longer”?
Sustained momentum in the US economy was also fuelled by a decline in the weekly jobless claims to 198,000. The number of Americans filing claims for unemployment benefits for the first time is now at a nine-month low showing the labour market is resilient as we head towards the end of October. This data is fantastic news for the economy, but we’ve seen that good news can be bad news for markets. The currently strong US economy helps fuel the “higher for longer” narrative, and as a result of this we have seen US bond yields continue their recent weakness. The yield on the 10-year US government bond reached new 16 year- highs, rising as high as 4.99% on Thursday. Concerns around US fiscal deficits have also led to rising bond yields. It will be interesting to see if the bond vigilantes lead to a change in fiscal approach in the US, similar to the situation 12 months ago in the UK following Liz Truss’ unfunded spending plans.
“There are a million ways to make a million dollars in markets”, was once stated by industry expert, Jack Schwager. This statement is completely true and there are several approaches to investing, however we are consistent with our specific approach. We stress the importance of diversification within portfolios across asset class, sectors, styles and regions. This week has proved painful for investors as most asset classes have struggled, although there have been bright spots, such as gold and alternative strategies, including trend-following. Geo-political risks remain at the forefront of investor minds in the short-term. Concerns around potential oil embargos have led to increasing inflation expectations, which has hurt government bonds (which are typically a safe haven asset). Energy equities have outperformed the market and gold has been the asset of choice for safe-haven searching investors.
On a final note, for the England rugby fans, miracles can happen, although we think it unlikely we will be discussing an England win against South Africa in the semi-finals. Fingers crossed.
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.