Heading into this week UK investors were focused on the outcome of the Bank of England’s meeting. Following the 25bps (0.25%) moves made by the US Fed and European Central Bank (ECB) last week there was a strong feeling that UK policymakers would mirror their counterparts.
The BoE meeting took place on Thursday morning and concluded with a 25bps rise, setting interest rates at 4.5 %. This is now the 12th consecutive rate hike with rates reaching a level last seen in 2008. Analysing the MPC votes, 7 out of 9 of the committee voted for a hike with only two members voting for no change. The strength in belief of the decision falls hand in hand with Governor Andrew Bailey’s comments, stating “We must stay the course to make sure inflation falls back to the 2% target”. It is unclear whether this will be the peak in interest rates as UK inflation still remains high, driven by rising food prices and a resilient labour market, factors the BoE consider before decisions. Will we reach the 5% mark before the end of the year? We will have to wait and see. Following the meeting the BoE released their growth forecasts for the UK. After a very bleak outlook at their February 2023 meeting, UK growth was significantly upgraded by the BoE in what Governor Bailey said, “may be the biggest upgrade we’ve ever done”. Despite the outlook for the UK not looking great, the news that the country is expected to avoid recession is positive.
The BoE’s comments on UK GDP looked a little foolish this morning, as GDP data came in showing the UK unexpectedly declined by 0.3% in March, lower than expectations.
US inflation data was released on Wednesday, coming in at 4.9% (year-on-year) for April, slightly below the 5% in March. Month-on-month inflation was 0.4%, in line with forecasts. Inflation has remained persistently high and although this is the 10th consecutive month inflation has dropped, it is still running over double the 2% target the US Fed have set. Shelter (rent) once again was the key contributor to the monthly increase. Despite inflation being above target, there is a lag between policy action and effect, which is acknowledged by the US Fed. Therefore, there is potential for the Fed to pause rate rises and assess the impact on the economy.
Inflation continues to dominate the weekly as German inflation for April was also released on Wednesday. Headline inflation was 7.2%, falling slightly from the 7.4% in March. Food price inflation was the major driver of German inflation, it remains elevated but has slowed from 22.3% to 17.2% this month.
China has been an under discussed topic this week as investor minds were elsewhere, however economic activity in the country seems to be slowing. Imports in April (year-on-year) collapsed by -7.9%, a sharp fall from the previous month of -1.4%. This data came as a surprise given the recent re-opening of China and pent-up demand and excess savings of consumers. Exports slowed to 8.5% (year-on-year) from 14.8% in March. Higher interest rates and recession risks for many of China’s global trading partners have a part to play showing that the post pandemic recovery will be slower than expected. Market expectations for China’s GDP growth of around 5.5% – 6% will certainly be revised.
Apple, the world’s largest company has decided to delve deeper into the emerging markets (EM) and has announced the opening of their first online store in Vietnam. The company most known for the iPhone has focused on driving growth in other EM countries with first stores opened in Mumbai and Delhi amid the slowing sales in China. Younger populations, scope for better infrastructure and less product competition are just a few reasons Apple are betting on the EM space.
To round up the weekly, I am going to echo the words of Governor Andrew Bailey. “We must stay the course” is a leading approach and this is consistent with our internal investment philosophy and process. We identify exceptional fund managers that can operate in a variety of market environments, while maintaining a long-term approach.
Nathan Amaning, Investment Analyst
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