If you find discussions of employment rates and wage inflation uninteresting or even dare I say it boring you have our sympathy. I’ve heard that many people in the Treasury have a similar view. However, their importance to the global economy and in turn to our clients cannot be underestimated, so I would ask you to persist and read on.
With that in mind, we will start with the UK; unemployment dropped to 4.5% and average weekly earnings were 7.2% higher compared to 12 months ago. Many believe this will be enough to force the BoE to raise interest rates, possibly as soon as December. However, the slight complication here is that these figures are skewed by both the furlough scheme, which closed at the end of September, and the fact that we are comparing wages to last year when they were heavily impacted by COVID-19. The reaction to this data in bond markets was muted and we have seen yields fall (prices rise) this week across most developed nations following a period of rising yields. Staying with the UK economy, GDP data highlighted that the economy grew by 0.4% in August and is now only 0.8% below the level it was pre-COVID in February 2020.
Inflation has been a topic we have covered frequently over recent weeks and Wednesday’s US CPI figure of 5.4% means we need to spend a bit more time on the subject. If we drill down into what was contributing to the higher than expected inflation print this week, we can see that rent and food costs were key drivers. For the average person, this can pose problems as both shelter and food are typically necessity goods that consumers simply must buy. Higher prices here will mean many people need to cut back spending in other areas of the economy. It may also encourage individuals to push for higher wages or look to move to higher-paid jobs to make sure their spending power keeps up with inflation.
The International Monetary Fund (IMF) released their latest World Economic Outlook report this week. For readers that like detail, the full report can be found on the IMF website – but be warned it is 172 pages long! In brief, the IMF still see the global economy in recovery mode, even if the delta variant has caused COVID-19 induced problems to persist. They did slightly downgrade their world growth expectations for 2021 from 6% to 5.9%, citing COVID-19 and supply disruptions as two causes. On the positive side of things, a firmer commodity pricing environment should see better than expected growth from the commodity-exporting nations.
In this data-heavy week, we have seen most global equity bourses move higher. The UK market has been particularly strong, driven by a firming commodity price environment as well as a high weighting to financials, which have performed well on the prospect of interest rate rises. Our portfolios are global in nature, and while we are exposed to markets such as the US and themes including technology, we also have meaningful exposure to the UK market and include themes like resources, which have been strong this week.
Andy Triggs | Head of Investments, Raymond James, Barbican
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