POTENTIAL FOR HIGHER INTEREST RATES LEAVES MARKETS UNMOVED

POTENTIAL FOR HIGHER INTEREST RATES LEAVES MARKETS UNMOVED

This week the Bank of England gave the first indication that interest rates will begin to rise in order to keep inflation contained. Overall, its assessment remains unchanged. It expects inflation to be temporary and for the UK to continue its recovery, although it now says inflation will hit 4 per cent and growth will be slightly weaker. The change to the outlook for interest rates barely saw a reaction from markets.

Elsewhere, there was further fallout from the Chinese government’s crackdown on corporate irregularities and excesses (real and imagined). Shares in video games and social media companies Tencent and Kuaishou plunged as the communist party accused them of corrupting China’s youth. However, global equity markets have generally ignored the localised problems and with concerns about the spread of Covid apparently waning US and European shares touched all-time high values. In previous weeks any one of these news items would have been enough to spark some volatility but the lack of reaction suggests the summer lull is here and many investors are on the beach.

UK: BANK OF ENGLAND HOLDS RATES BUT WARNS INFLATION WILL HIT 4%

The Bank of England’s Monetary Policy Committee left interest rates unchanged once more but indicated that rates will increase modestly over the next two years to keep inflation tamped down. It has revised its expectations for short-term inflation and now says it expects the Consumer Prices Index to hit 4 per cent in the autumn. However, it has stuck with the view than current inflation will be temporary. The bank has also maintained its support for financial markets by keeping its bond buying programme in place at its current level.

The bank’s latest assessment is for the economy to continue its recovery but for growth to begin to slow through the second half of the year. Although the bank now expects inflation to peak at 4 per cent in the final quarter of this year it says the slow progress in reducing unemployment, and with many people still on furlough, inflation is not feeding through to wages in any meaningful way.

GLOBAL: EQUITIES AT RECORD HIGHS AS RECOVERY BEGINS TO SLOW

Global equity markets have been buoyant this week as investors have shrugged off concerns about the spread of the Delta variant of Covid-19 and further volatility in Chinese equities. US and European equities have been particularly strong with the S&P 500 and the MSCI Europe indices hitting fresh all-time highs.

The strength of equity markets is a slight contrast to indicators of economic growth. This week’s PMI figures indicate the recovery from last year’s recession is starting to lose steam. In the UK, services PMIs decreased from 62.4 in June to 59.6. The figure remains at the very high end historically, however, supply chain restrictions and staff shortages have created severe constraints on growth. This pattern is repeated in manufacturing and services in many developed economies. In China, where economic recovery is more advanced, manufacturing PMI dropped to 50.3 from 51.3. This is the lowest level seen in 15 months and only just above the level which indicates economic contraction.

EQUITIES: HOUSEBUILDERS REAP THE BENEFIT OF THE PROPERTY BOOM

Taylor Wimpey posted very strong profits for the first half of its financial year as it becomes the latest builder to benefit from the UK’s coronavirus housing boom. The company said it built a record number of homes in the six months to 4th July as average prices increased 6.5 per cent to £327,000. Several other housebuilders, including Persimmon, Redrow and Barratt Developments, have reported bumper sales as a combination of the stamp duty holiday, low interest rates and lockdown savings have generated a surge in demand from buyers.

The UK is not the only country experiencing a pandemic-related housing boom. Although there are signs that the UK’s Covid property boom is beginning to slow as the stamp duty holiday winds up, data from the OECD this week shows the vast majority of developed countries are seeing house prices rise. Only three out of 40 countries tracked by the OECD have seen prices fall this year and several countries are seeing prices rising at their fastest since before the financial crisis.