MUNIX AUGUST 20th
The UK benchmark gilt yield has edged down in the past week to leave it a little above 0.5%. One of the reasons has been safe-haven trades, as equity investors have moved out of the stock market on concerns about the delta variant affecting global growth and more evidence of a slowdown in the Chinese economy. However, on balance the latest set of economic data in the UK also suggested that the Bank of England need not be aggressive in its decision making.
The first surprise was the fall in headline inflation to 2% a year in July. True there were special factors such as the degree of discounting in the summer sales, and all the signs are that headline inflation will pick up again towards at least 3% a year into year end. Increases in energy costs have already been announced, plus the impact of various supplier bottlenecks, most obviously in car production facing a shortage of chips, is materially affecting global production and pricing. In addition, average earnings have surged over the summer, almost 9% from a year ago, albeit part of this is related to bottlenecks in the labour markets as different sectors recover from lockdown at different rates.
Another sign of the transition in the economy was the retail sales report for July. This unexpectedly fell by 2.5%, the largest since January, although again there are signs from credit card data that one of the explanations was more household spending on the services sector, especially leisure, entertainment and tourism. It is a provisional report but suggests that economic growth was on a slower path at the start of the third quarter. Unemployment has declined steadily to a rate of 4.7% but this is still about 1% above the pre-pandemic trough. As ever, there is evidence on both sides for the hawks and doves, but on balance the data indicate no need for the MPC to be aggressive in its statements or decisions in coming months.
Of course, the UK bond market will be affected by international considerations. Next week, all eyes will be on the Jackson Hole symposium for central bank governors, talking about “Macroeconomic Policy in an Uneven Economy”. There will be lots of statement from the policy makers in all the important countries, but the main act will the Chairman Jerome Powell’s speech. Minutes of the latest Federal Reserve meeting suggest that a majority of Fed members are in favour of tapering the QE programme, but the market place is most interested in Powell’s comments about the timing and the speed of toning down the bond purchases. Other central banks have modestly begun to withdraw from their intervention in government debt markets but the decision by American policy makers will be particularly influential.
Andrew Milligan an independent economist and investment consultant. From 2000-2020 he was the head of global strategy at Standard Life/Aberdeen Standard Investments, analyzing the major financial markets for global clients. He currently assists a range of organizations with reviews of their investment processes, advice on tactical investing and strategic asset allocation, and how to include ESG factors into their decision making.
Andrew Milligan is an independent economist and investment consultant. This note should be considered as general commentary on economic and financial matters and should not be considered as financial advice in any form.
Andrew Milligan an independent economist and investment consultant. From 2000-2020 he was the head of global strategy at Standard Life/Aberdeen Standard Investments, analyzing the major financial markets for global clients. He currently assists a range of organizations with reviews of their investment processes, advice on tactical investing and strategic asset allocation, and how to include ESG factors into their decision making