It has been a busy week for press conferences in the UK. Not only are premier league managers talking in front of the cameras ahead of the start of the new Premier League season tonight, Bank of England (BoE) Governor Andrew Bailey delivered his verdict on the UK economy after the BoE raised interest rates by 0.5%, the biggest rise in 27 years.
The BoE members voted 8-1 in favour of a 0.5% interest rate increase, which has taken the headline rate level to 1.75%, the highest since 2009. Their outlook for the UK economy was gloomy, with predictions that inflation would now reach over 13% later this year and that the economy would shortly enter recession. UK equities, despite the negative outlook for the economy, finished the day higher, while UK government bond yields fell (prices rise) and sterling declined versus most major currencies. The UK housing market will likely be negatively impacted by higher interest rates as the cost of borrowing for homebuyers will increase. This coupled with rising energy costs and already high house prices makes house affordability difficult. We may already be seeing the early signs of a slowdown with reports from Halifax this week showing UK home prices dropped by 0.1% in July compared to June, the first monthly decrease in over a year.
This week saw US House Speaker Nancy Pelosi visit Taiwan, making her the highest ranking American official to visit in 25 years. The visit has led to a rise in geopolitical tensions with China, who embarked on live fire exercises in close proximity to Taiwan. China has also placed certain trade sanctions on Taiwan and sanctions on Nancy Pelosi.
Despite this difficult backdrop equity markets continued to advance this week, albeit at a slower pace than last week. The gains were fuelled by continued belief that central banks will change tack sooner rather than later with their approach to interest rate hikes as weaker economic data forces their hand. We will have to wait and see whether this will happen, although hawkish comments from US Fed member Bullard suggested they haven’t given up on raising interest rates to combat inflation. Speaking on Tuesday, Bullard said the US Fed “are going to be tough” on inflation and that “we can take robust action to get back to 2%”.
Heading into Q2 earnings season there was a lot of concern about how companies would be coping with rising costs, labour shortages and supply issues, but by and large it’s been a better-than-expected earnings season. BP produced stellar results this week, beating profit expectations, allowing them to increase its dividend by 10% and announce a further $3.5bn share buyback plan.
The main economic data was saved until the end of the week with US Non-Farm Payrolls being released. The data showed 528,000 jobs had been added, more than double the expected number. The extremely large increase in employment will give the US Fed confidence that the economy is in a strong position and that they will need to keep on their aggressive interest rate hiking path to tame inflation. In the immediacy we saw government bond yields rise and the US Dollar strengthen as investors re-calibrated their interest rate and inflation expectations.
Stock markets have staged a mini-recovery over recent weeks following a very tough first six months of the year. We do think markets will continue to be choppy given the current high level of uncertainty in the global economy. There is long-term value appearing in most asset classes, but we are mindful that there is the potential for things to get worse before they get better, and this leads us to continue to be well diversified across our sector, style and geographical positioning. We also continue to be active in our fixed income allocations, looking to take advantage of the extreme volatility we are seeing in this asset class.
Andy Triggs, Head of Investments
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