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Please see below the latest daily investment bulletin from Brooks Macdonald, which was published and received this morning (05/08/2022):

What has happened

Equity and bond markets were generally quieter at a headline level yesterday, however with oil prices continuing to fall, WTI oil below $90 per barrel and Brent below $95 per barrel, the energy sector saw stark underperformance.

Bank of England

The Bank of England presented a gloomy picture for the UK economy as it announced a 50bp rate rise, the largest since 1995. Whilst forward guidance for central banks is, at best, on hold for this cycle, further rate hikes seem likely given the Bank’s focus on inflation and its lofty predictions of where year-on-year inflation rates could end up. The BoE predicted a prolonged contraction in economic activity, starting in Q4 of this year then lasting until the start of 2024. Alongside this, the Bank forecast that inflation would reach 13% this year before falling in coming quarters. These numbers are quite spectacular changes from previous guidance and paint a very downbeat outlook for the UK economy. One of the big question marks at the moment is how UK government fiscal policy will play out, and for that we will need to know the next Conservative Party leader. 

US Employment Report

The initial jobless claims in the US have been a recent area of weakness for the US labour market outlook, showing a worsening picture even as the non-farm payroll reports showed a more upbeat picture. Yesterday’s claims came in line with expectations however the number of ongoing claims rose more than expected, suggesting that those claiming are struggling to find roles as quickly. Given the importance of the employment outlook to the US Fed, today’s employment report will be critical to whether the US central bank begins to more formally pivot to concerns around economic growth and inflation rather than inflation alone. The market expects 250,000 new jobs to have been created in July and for unemployment rate to stay steady at 3.6%.

What does Brooks Macdonald think

Recent Fed speakers have used the strong labour market backdrop as the crux of their argument as to why Fed interest rates still need to rise to tackle inflation. A weaker employment report will question this narrative and lead the Fed to consider a more balanced view of future interest rates. Recent corporate earnings have painted a more positive picture of the economy in the near term however the initial jobless claims suggest that there are now signs the US economy is losing some of its momentum.

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Carl Mitchell – Dip PFS

Independent Financial Adviser