Please see the below article from Brooks Macdonald highlighting the key factors influencing markets around the world, as well as offering their take regarding the effect on future investments. Received late this morning – 18/08/2022
What has happened?
An upside beat to UK CPI and some hawkish central bank messaging from the central bank of New Zealand led risk appetite to reverse yesterday with European equities falling by almost 1% and the German index falling by over 2%. Over in the US, longer duration equities underperformed with the US technology index giving back some of the strong gains of the last week.
UK CPI
The UK inflation release was the early catalyst for the more sombre mood in equities yesterday. UK CPI rose to 10.1% in July versus market expectations of 9.8%. This release prompted two conclusions within bond markets, a confirmation that the path of European and US inflation is likely to diverge and secondly that the Bank of England will need to become even more aggressive on rate rises. The market now expects 50bps of rate rises at each of the three remaining meetings in 2022, aggregating to a total rise of 1.55% from the current base rate. UK government gilts also saw their yields climb as a stickier inflation backdrop and tighter monetary policy was priced into the market. Double digit inflation in the UK may prove a psychological threshold for consumers but makes it difficult for the Bank of England to focus on the rising economic growth risks.
FOMC Minutes
Whilst the tone yesterday was very much risk-off, the Federal Reserve meeting minutes were viewed more constructively by investors. The minutes showed that the committee was aware of the risk that they will over tighten policy given the time lag that interest rate hikes and quantitative tightening have in feeding through to the real economy. This risk of monetary policy overshoot would be particularly acute if the August CPI release shows a further slowing in headline CPI after the July miss. The minutes also reiterated the message from the Fed that ‘it likely would become appropriate at some point to slow the pace of policy rate increases’.
What does Brooks Macdonald think?
Given the August Fed break, we have another round of economic data, including CPI and the US jobs report, before the next Fed meeting in September so plenty could change however the US does look in a very different place to Europe. It was the realisation that a US CPI miss was not a global panacea that led to yesterday’s retrenchment and it could mean that equity gains from here are more regionally selective.
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Alex Kitteringham
18/08/2022