Strong economic data, rising interest rates but big political debates to manoeuver...
UK news has been politically driven this month, with the Conservative Party conference igniting fruitful debate. In her speech, Theresa May stressed the need for unity in order to advance the prospects of a ‘good’ Brexit deal and an end to austerity measures. In regard to economic data released this month, both manufacturing and industrial production showed improvement in August, with GDP flat on the month and an annual rate of 1.5% over the quarter. However, according to the latest statistics from the Confederation of British Industry, manufacturing orders have fallen at the fastest rate since 2015. Meanwhile, despite unemployment remaining at its lowest level since the mid-1970’s and average earnings moving higher to 2.7%, inflation is eating into this gain, with real wage growth remaining subdued. Lastly, core consumer price index (CPI) inflation moved slightly lower to 2.4%, but remains above the 2% target as Brexit chatter continues to dominate headlines. May has stated that we need to “hold our nerve” and that 95% of the Brexit withdrawal agreement had been agreed, however over half a million voters led a ‘People’s Vote’ march to London’s Parliament square seeking a referendum on the final Brexit deal.
For the US, the economy grew at its fastest rate for nearly four years in the second quarter of 2018, fuelled in part by rising spending, investment and exports. The US Commerce Department confirmed at the end of September that gross domestic product (GDP) increased by 4.2% between April and June, which is the fastest increase in GDP since the third quarter of 2014 and is almost double the 2.2% growth recorded at the beginning of 2018. The growth is largely thanks to President Donald Trump’s $1.5 trillion tax cut which has boosted consumer spending. There has also been a fall in imports, a rise in government spending and an increase in corporate profits from 1.2% to 3%. The US increased the Federal Fund rate by 0.25%, citing economic growth and strong employment. The benchmark rose to a range of between 2% and 2.25% and is expected to be increased further later this year.
In Europe, Mario Draghi highlighted that the recovery in inflation is conditional on interest rates remaining low until next summer. Meanwhile, the Italian government looked to push forward an expansionary budget for 2019 with a reduced retirement age and increased welfare spending. The EU dismissed the planned spending proposals, resulting in borrowing costs on Italian debt returning to near four year highs.
Equities faced a challenging month with the FTSE plunging to its lowest level in six months on the back of global growth concerns and the prospect of higher US interest rates. The Dow Jones initially led the move after Donald Trump commented that the Federal Reserve had “gone crazy” following the interest rate rise. This, in conjunction with US and China trade war concerns, ignited a sharp drop in the middle of the month – which was bolstered by continued strained relations between the US and Saudi Arabia.
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