MARKET UPDATE: DECISION TIME ON UK INTEREST RATES AS BANKER FORUM KICKS OFF IN PORTUGAL

MARKET UPDATE: DECISION TIME ON UK INTEREST RATES AS BANKER FORUM KICKS OFF IN PORTUGAL

18th June 2018

LAST WEEK – KEY TAkeAways

UK inflation remains steady while unemployment falls

  • The UK consumer prices index (CPI) remained at 2.4% in May, according to the Office for National Statistics (ONS).
  • Economists had predicted a rise, but falling cost of computer games and confectionary helped offset rising petrol prices.
  • Unemployment fell by 38,000 between February and April, remaining at 4.2%, while average earnings rose by 2.8%.
  • The Omnis view: it is encouraging that unemployment remains at its lowest levels since 1975, though wage growth is modest, and the UK economy remains fragile.

US unveils 25% tariffs on $50bn on Chinese goods

  • Tariffs are due to come into effect on 6 July and will impact more than 800 products.
  • President Trump said the US’s trade relationship with China was “no longer sustainable”.
  • China retaliated, saying it will impose an additional 25% tariff on 659 US goods worth $50bn.
  • The Omnis view: further tariffs could well come into play over the coming months though we maintain our view that there are no winners from a trade war.

US Fed raises interest rates as Bank of Japan holds steady…

  • The Federal Reserve raised interest rates for the second time this year, taking the range of its Federal Funds Rate from 1.75% to 2%.
  • US officials now expect four interest rate rises this year – meaning rates may raise by another 0.5% by the end of the 2018.
  • The Bank of Japan kept its short-term interest rate target at -0.1%, and pledged to guide 10-year government bond yields to around 0%.
  • The Omnis view: the world’s major central banks are at different stages of tightening, with the US furthest down the line. However, this has been well signposted by policy makers to avoid market shocks.

…as ECB calls halt to quantitative easing

  • The European Central Bank’s bond buying programme – current €30bn per month – will be reduced to €15bn a month after September, and ended completely by the close of this year.  
  • ECB president Mario Draghi said the programme had succeeded in the aim of putting inflation on course to meet its target of being below but close to 2%.
  • Draghi also said there would be no prospect of an increase in the ECB’s key lending rate – currently 0.0% – until next summer at the earliest.
  • The Omnis view: this is a positive move from the ECB, though eurozone economies could still be impacted by political issues, with pressure this week on the German coalition government.

China’s industrial output and retail sales slow

  • China’s industrial production grew by 6.8% in May from a year earlier, though this was below expectations of 7%.
  • This represented the slowest pace of expansion since the National Bureau of Statistics started the series in 1996.
  • Retail sales of consumer goods grew 8.5% year-on-year, though this was the slowest pace since June 2003.
  • The Omnis view: the Chinese economy is slowing, but this is to be expected given its size and long-term transition to a consumer-led economy.

Looking ahead - TALKING POINTS

Bank of England set to hold rates

  • The Bank of England’s Monetary Policy Committee will meet to make a decision on interest rates, having voted seven to two to hold at 0.5% in May.
  • As outlined above, inflationary pressures have eased, meaning a rate rise is unlikely this month.
  • Some economists doubt interest rates will rise at all this year.
  • The Omnis view: with the real impact of Brexit uncertain, policy makers are unlikely to rock the boat by making any shock decisions that could derail the economy.

UK inflation rate (%) – May 2017 to May 2018

Rsz _june _2018_united -kingdom -inflation -cpi

Source: Office for National Statistics, tradingeconomics.com

All eyes on Central Banking Forum  

  • The fourth annual European Central Banking Forum on Central Banking is taking place in Sintra, Portugal.
  • The big theme for discussion is on price and wage-setting in advanced economies.
  • Speakers include ECB president Mario Draghi – who has overseen 0% interest rates in the eurozone since March 2016 - and US Federal Reserve chair Jay Powell.
  • The Omnis view: this is an important summit which gives policy makers an opportunity to shape market expectations on the monetary policy outlook.

Eurozone interest rates (%) – May 2014 to May 2018

Tjune _18_euro -area -interest -rate

Source: European Central Bank, tradingeconomics.com

Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest

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).