Last week the US Fed paused its interest rate hiking cycle after raising interest rates at 10 consecutive meetings over a 15-month period. This week the Bank of England (BoE) didn’t quite surprise markets with a pause, but instead increased rates by 50bps to 5%. Investors were largely expecting a 25bp rise this month, however the significant 50bps rise has now taken interest rates to its highest level since 2008.
“Significant news” referring to stickier inflation and high wage growth were the main reasons for the BoE raising interest rates. Seven out of nine committee members voted for the 0.5% increase with the other two members opposing the rate increase and voting for a pause as they are more optimistic that forward looking indicators point to steep falls in inflation going forward. Governor Bailey however reiterated that they would do whatever is necessary in order to bring inflation back to the 2% target. This move has as ever fed into mortgage rates with high street banks now quoting over 6% for two-year fixed rate products.
UK inflation was worrying to see on Wednesday and as ever played a strong part of the BoE’s decision. Headline inflation in May was 8.7%, the same level as April, with core inflation rising to 7.1% from 6.8% the previous month. The headline inflation level is uncomfortable for many key policymakers within the country and most notably for Prime Minister Rishi Sunak, who at the beginning of this year pledged to halve inflation by the end of 2023. The 2024 general election is continuing to look less and less favourable for Mr Sunak and the Conservatives, as failing to keep promises in addition to rises in mortgage costs for millions of homeowners diminishes confidence in the party.
Fresh after news of the BoE interest rate rise, the Rail, Maritime and Transport union (RMT) announced 20,000 of its members would be continuing strikes over the month of July. The union settled a deal with Network Rail but have failed to agree deals with other trainline operators, with pay offers considered too low to combat the rising cost of living. The Open Championship (golf) and the fourth and fifth Ashes tests (cricket) are some of the events due to face disruption.
News around Germany’s economy has been disappointing since it was announced they had fallen into a technical recession over Q1 2023, however this week we have seen the greatest planned foreign investment in Germany’s history announced. Intel, one of the world’s largest semiconductor manufacturers has agreed to spend over $33 billon on two chip-making factory plants as part of an expansion push in Europe. Approximately 7,000 construction jobs will be created along with 3,000 high tech jobs at Intel as they battle to restore market share in the chipmaking industry, rivalling the likes of Nvidia, whose stock value is up 165% in 2023.
In the US, initial jobless claims have remained high at 264k, the 20-month high from last week. This is calculated as the number of people filing for unemployment benefits for the first time and continued elevated numbers could be an indication of a softening labour market. Such data releases will be considered by the US Federal reserve who paused interest rate hikes in last week’s meeting and are in a “meeting by meeting, data dependent phase” of its tightening cycle. It is broadly estimated that the US Fed will continue to keep rates elevated for longer in order to combat inflation.
We have recently been meeting with a lot of fund managers who all leave us with interesting takeaways. One UK equity fund manager mentioned that in the 30 years of his career he had never been so excited for the opportunities within his asset class, with the next 10 years offering incredible potential in his opinion. We will continue to partner with talented fund managers in order to support our investment ideas and assist diversification across asset classes, investment style and regions.
Nathan Amaning, Investment Analyst
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