A month of monetary policy focus and record breaking bull runs.
August saw the UK base rate rise to 0.75% which is the highest rate since March 2009. Whilst there are no further hikes forecast for this year the move was advocated by all nine Monetary Policy Committee members. Mark Carney highlighted that economic growth will recover from the 0.2% rate seen in the first quarter of 2018, to 0.40% in the second quarter and maintain that pace later in the year. The Bank sees continuing ‘modest’ economic growth of 1.40% this year and an increase to 1.80% next year with unemployment expected to fall further and wage growth pick up with inflation falling back towards the Bank of England’s 2% target by 2020. We saw UK second quarter GDP increase by 1.3% year on year and industrial production, manufacturing along with construction all increasing in June. With the trade deficit narrowing to add further to the improving landscape one might have thought the Great British Pound would be stronger. However this data is backward looking and markets remain more concerned about the management of Brexit and the risk of a ‘no-deal’. The jobless rate has moved from 4.2% to 4% this month which is the lowest rate since the winter of 1974-75. The record low was 3.4% in 1973 however the fall in unemployment failed to lift wage growth and ultimately Brexit Management is the key to UK plc’s success over the short to medium term. Consumer Inflation has crept higher to 2.5% (the first rise since November) meaning that real wage growth has remained subdued.
In Europe the European Central Bank (ECB) warned this month that the "prominent" risk of increased protectionism threatens the world economy. Dangers to the global economy have "intensified" because of the tariff disputes started by US President Donald Trump, the ECB said in its latest economic bulletin. While global growth remains strong, economists around the world have been alarmed by Trump's efforts to eliminate the nation's trade deficits, imposing tariffs on China as well as allies such as the EU and Canada. The bulletin said: "Downside risks to the global economy have intensified, amid actions and threats regarding trade tariff increases by the United States and possible retaliation by the affected countries." With regards to interest rates, it is broadly anticipated that the European Central Bank will commence tapering this year – but rate hikes are still some way off, with signs of a move not expected until mid to late 2019. Italy has called for an extension to QE and no doubt both Turkey and Greece would appreciate a ‘lower for longer’ stance.
US Dollar had remained strong as market uncertainties and tightening fiscal policies have strengthened the reserve currency. There was a pull back of the dollar after President Trump criticised Fed interest rate hikes and USD assets had a short term boost with gold and oil both rising however the currency generally remains buoyant. Subsequently Jerome Powell, the chairman of the federal reserve, has reiterated his commitment to raising interest rates stating that a “gradual process” of rate rises was “appropriate” to avoid” moving too fast and needlessly shortening” economic expansion or “ moving too slowly and risking a destabilising overheating”.
Equities have had a pretty good run so far this year in fact Wall Street celebrated its longest bull market run in history this month as performance surpassed the 1990’s rally. The definition of a bull run is a period of rising markets without a 20% fall which began in March 2009 and passed the 3543 day landmark this month. The benchmark S&P 500 touched a record high of over 2898, whether this can be maintained is yet to be seen.
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