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Weekly comment: 07.08.2017

Economic Overview, Richard Carter

The highlight of last week on the macro front was the Bank of England meeting and accompanying Inflation Report. As expected, the MPC voted 6-2 in favour of leaving interest rates unchanged but the overall tone of the statement was quite dovish, with modest downgrades to wage and growth forecasts and somewhat superfluous warnings about the impact of Brexit on business investment. The tone from the MPC is likely to ebb and flow over the coming months and they will seek to avoid any complacency amongst consumers and investors about the potential for rate hikes, but overall we expect them to remain on hold for the foreseeable future.

Elsewhere, Friday’s US nonfarm payrolls report was unreservedly upbeat with strong job creation, falling unemployment and better than expected wage growth but it doesn’t materially alter the outlook for the Fed. They are likely to start winding down their balance sheet in September and will probably wait until December to raise rates again, unless inflation picks up unexpectedly. One potential issue that is starting to gain attention is the need for Congress to raise the US debt ceiling by early October. Usually this slightly arcane process is managed without too much trouble even if accompanied by a certain amount of political point-scoring but there is always the scope for mishap with the Trump administration running the show.

The week ahead looks to be fairly quiet on the macro front with the main data release, US inflation, not out until Friday lunchtime. UK manufacturing output and Chinese CPI are out in the meantime but the next main event is probably Draghi’s speech at the Jackson Hole conference, taking place between 24th and 26th August.

Market Overview, Alan McIntosh

US stocks registered another all-time high last week, with the Dow Jones Index closing above 22,000 for the first time ever. There is much talk about the US stockmarket and why it continues to plough ahead despite US President Donald Trump’s inability to push through any of the reforms that he promised on his election campaign. A number of factors continue to support the recent rise in share markets. First, you can’t just isolate the US from other regions. All major stockmarkets have been rising. For the first time in many years, all of the important economic regions in the world are showing positive economic growth. This is supportive of rising share prices.

In the specific case of the US, the recent fall in the dollar (down 10% on a trade weighted basis in the year to date) is providing a helpful tail wind for US multinationals. Add in the recent improvement in the eurozone economies and this gives another fillip to demand. The US has just delivered the second best quarter for corporate earnings in six years (Q1 was the best) and if the dollar remains weak, this momentum should continue into the second half of the year. Should Donald Trump succeed with any of his promised tax reforms, then this will add some icing to the cake. But as we stand, the cake is in pretty good shape as it is!

This commentary has been prepared for information purposes only and is not a solicitation or an offer to buy or sell any security. It does not purport to be a complete description of our investment policy, markets or any securities referred to in the material. The information on which the commentary is based is deemed to be reliable, but we have not independently verified such information and we do not guarantee its accuracy or completeness. All expressions of opinion are subject to change without notice. Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return. Quilter Cheviot is the trading name of Quilter Cheviot Limited, a private limited company registered in England with number 01923571, registered office at One Kingsway, London, WC2B 6AN. Quilter Cheviot has established an office in Dublin, Ireland with number 904906, is a member of the London Stock Exchange, is authorised and regulated by the UK Financial Conduct Authority, is regulated by the Central Bank of Ireland for conduct of business rules, under the Financial Services (Jersey) Law 1998 by the Jersey Financial Services Commission for the conduct of investment business in Jersey and by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 to carry on investment business in the Bailiwick of Guernsey. Accordingly, in some respects the regulatory system that applies will be different from that of the United Kingdom.

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Markets spent most of last week watching the White House soap opera unfold, ending with the departure of chief strategist Steve Bannon. The optimistic spin being put on this is that it will allow Donald Trump and what is left of his team to focus on tax reform, an issue that is obviously of great importance to investors. Firstly though, the administration needs to prove it can work effectively with Congress and get the debt ceiling raised by early October otherwise the ‘full faith and credit’ of the United States will be tested. Meanwhile, in the UK, the government published a number of position papers on Brexit as hopefully a way of pushing the negotiations with the EU forward; they were a reminder also of how fiendishly complicated some of the issues are likely to prove which will almost inevitably mean a long transition period is required. This week, investors will be looking forward to the Jackson Hole conference where Janet Yellen and Mario Draghi are due to speak. This annual summit occasionally produces market-moving speeches from central bankers and there is plenty for them to talk about in terms of low inflation, quantitative easing and currency markets. Markets are understandably aware that low interest rates and QE have been a big driver of the strong returns that have been enjoyed in recent years and are obviously sensitive to any sign that this support is about to end. We would expect Draghi and Yellen to continue to sound pretty dovish though as there remains a real lack of significant inflation pressures despite low unemployment rates and solid economic growth.
Tim Childe, head of Quilter Cheviot’s Jersey office and head of international, has been listed as one of Citywealth’s top 20 men in private wealth management for 2017. With over 30 years’ experience in the investment management industry, the last 27 at Quilter Cheviot, Tim is highly experienced in managing investment portfolios for charities, family trusts and private clients around the world. Tim said, “I really enjoy dealing with clients and helping them to meet their financial aspirations, and so to be nominated for inclusion by my peers was a great honour in itself. I am thrilled to have my efforts recognised by being recommended by Citywealth’s leaders list.” Selections are made by the editors of Citywealth based on ten years of industry experience and market research within the wealth industry, using criteria including communications skills, interpersonal skills and technical expertise.
Last week’s economic news was understandably put in to the shade by the bellicose rhetoric from the US and North Korea although the tension seems to have eased a little over the weekend. On the data front, though, it was the same old story with US inflation as headline CPI came in weaker than expected at 1.7% and core CPI was up only 0.1% on the month. Markets are now only pricing in a 40% chance of another Fed rate hike this year even if they will still start winding down their balance sheet from next month. The news out of Asia was mixed. In Japan, the economy apparently grew by an annualized 4% in the second quarter, boosted by business investment and consumer spending although there is always the chance that the first estimate will be revised lower. Data out of China, including retail sales, exports and industrial production, was weaker than expected. Looking ahead this week, we will get an update on the state of the UK economy with retail sales, the unemployment rate and inflation numbers all due to be released. Inflation is likely to have picked up a bit in July but we appear to be reaching the peak. US retail sales are also out.