MARKET UPDATE: UK INFLATION SET TO RISE?

MARKET UPDATE: UK INFLATION SET TO RISE?

16th October 2017

LAST WEEK – KEY TAkeAWAYs

US inflation climbs 0.5%

The US Consumer Price Index (CPI) rose 0.5% in September, though this fell short of consensus forecasts. If food and energy were stripped out of the data, core CPI rose by a much smaller 0.1%. Economists had predicted a larger pickup in inflation (to at least 0.6%) in the aftermath of Hurricane Harvey. While energy costs increased by the most since June 2009, the relatively subdued data gives the Federal Reserve plenty to think about before a possible interest rate hike in December.

Catalonia crisis rumbles on in Spain

Spanish prime minister Mariano Rajoy reportedly told MPs that democratic Spain was facing its most serious threat for 40 years, following the fallout from Catalonia’s impendence referendum. He has asked the Catalan government to clarify whether or not it has declared independence, with a chance that he may suspend the region’s autonomy and impose direct rule from Madrid. Independence could have a devastating impact on the Spanish economy – Catalonia accounts for around 20% of its GDP. The market reaction has been quite muted thus far.

US giants announce worker initiatives

Amazon has announced it has already begun recruiting 1,200 full-time permanent workers for a new fulfilment centre in Bolton, which will open next year. The investment will take the total number of permanent jobs it has created in the North West to more than 3,500, and is a vote of confidence in the UK in the midst of Brexit. Meanwhile, in the US a new programme, Grow With Google, will see the search engine giant commit $1bn in initiatives to train and educate workers as technology changes the nature of employment. 

FTSE 100 hits new record high

The UK’s blue-chip FTSE 100 index hit a new record high on Thursday, closing at 7,556 points, which beat the previous high of 7,547 points achieved in May. The index rallied following an impasse in the latest round of Brexit talks, which triggered a sell-off in sterling. A weaker currency makes British goods and services cheaper abroad and so is a boon to many of the multinational companies listed in London. New highs for the index have become commonplace in recent years, with the weaker pound a huge factor in share price increases since last year’s EU referendum.

UK growth muted, despite manufacturing boost 

The British Chambers of Commerce issued the results of its quarterly economic survey, which indicated the UK economy grew little in the third quarter of the year. This was despite manufacturers reporting sales and orders at the highest levels since the first quarter of 2015. The survey is based on the responses of over 7,100 businesses.

Looking ahead - TALKING POINTS

UK inflation set for rise

UK inflation is forecast to hit a five-year high of 3% when the latest Consumer Price Index (CPI) figure for the month of September is released on Tuesday. Inflation is expected to exceed August’s 2.9% figure, due in part to rising airfares, as well as climbing fuel and electricity prices. If it hits 3%, this would be the highest level since April 2012. Anything higher and the Bank of England Governor Mark Carney must write to the chancellor to explain why the rate has risen to such an extent.

A rise in inflation would put more pressure on the Bank of England to raise interest rates (their inflation target is 2%). A hike could come as early as next month, which could help to keep inflation in check and strengthen the pound. A weaker currency has pushed up the costs of importing fuel, food and raw materials.

UK inflation (as measured by the Consumer Prices Index)

Rsz _united -kingdom -inflation -cpi

Source: TradingEconomics.com, Office for National Statistics

China ready for regime change

As highlighted last week (see Market Update, 9th October), all eyes turn to Asia this week as China hosts is Communist Party Congress (starting on Wednesday), and Japan holds a general election (this Sunday), with Japanese Prime Minister Shinzo Abe’s ruling coalition on track for a comfortable win. China’s economic growth, debt and currency were understandably among the main topics for discussion at the annual meetings of the International Monetary Fund (IMF) and the World Bank last week.

In its latest World Economic Outlook released last week, the IMF raised its forecast for Chinese economic growth in 2017 to 6.8%, while for 2018 the prediction is for 6.5% growth. However, it has also urged the country’s leadership to intensify efforts to reign in credit expansion and strengthen financial resilience.

While the Chinese economy grew by 6.9% in the first half of the year, many are predicting this will now begin to slow. However, the country’s central bank governor, Zhou Xiaochuan, was quoted on the People’s Bank of China’s website on Monday as saying that 7% growth was possible for the second half of this year.

Chinese GDP growth

 Rsz _china -gdp -growth -annual

Source: TradingEconomics.com, National Bureau of Statistics

THE OMNIS VIEW

Through a well-diversified approach to asset allocation, the Omnis investment team aims to defend and grow the value of your portfolio through market cycles. As the world’s second-largest economy, what happens in China is of huge impact to global investment markets. Indeed, many companies listed in the UK have strong trade links with China or rely on its workforce as a manufacturer of goods. The Omnis view is that these markets will continue to outperform their developed market equivalents. 

 

The Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC are authorised Investment Companies with Variable Capital. The authorised corporate director of the Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address:  Washington House, Lydiard Fields, Swindon, SN5 8UB) which is authorised and regulated by the Financial Conduct Authority, 25 North Colonnade, London E14 5HS. Omnis Investments Limited does not offer investment advice nor make recommendations regarding investments. Potential investors are particularly advised to read the specific risks and charges applicable to the Funds which are contained in the Prospectus and Key Investor Information Documents (KIIDs).

Omnis Investments Limited is registered in England and Wales under registration number 06582314 (Registered Office: Washington House, Lydiard Fields, Swindon SN5 8UB).