Light on the horizon
A week is definitely a long time in politics. We have seen great upheaval since the end of September, culminating in the resignation of Liz Truss on October 20th and Rishi Sunak succeeding her on October 25th. Gilt yields have dropped sharply since then and Sterling has stabilised, making modest gains on the US Dollar recently that has helped more domestically focused UK companies. We held back our Commentary this month to see how the Consumer Price Index (CPI) would be likely to reflect current inflation trends in the US – more on this later. Concerns remain regarding wage demands in the UK at a time of tight labour market conditions combined with the contraction of 0.2% in the UK economy, signaling the start of a recession. On an international basis, Wall Street would probably have preferred a stronger Republican showing in the US mid-term elections.
There are indications that some elements of inflation are reaching their peak, and this is reflected in bond yields, particularly in the US, where money market indicators are pointing towards a CPI rate of around 3% in one year’s time. Unfortunately, the UK figure is still likely to be nearer double figures with much hinging on wage settlements (if they can be achieved).
With confirmation that the US CPI figures were better than expected, we may see a change of leadership in markets. If this is indeed the beginning of a major change of trend in the US, then there is scope for earnings there to be more highly valued. We are keen to maintain full weightings in this area even if markets ebb and flow from here. Lower interest rates should be good for bond investments as well, although we will have to be careful of sectors that have enjoyed favourable pricing, such as Energy, while others struggled.
The UK has not been particularly well served by recent Home Secretaries with perhaps an understandable focus on uncontrolled Channel arrivals. Lord Wolfson, the Next chairman, is focused on the tight labour market resulting in staff shortages, both in retail and elsewhere, damaging economic performance and creating additional inflationary pressure. A more targeted approach to taking in skilled people from abroad, who can contribute immediately to both private and public sectors would be very welcome. We await the announcement of the new fiscal policy agenda, which is expected to include spending cuts and tax rises.
We tend to be cautious about macro-economic events, but Ukraine is an area we still follow closely. We have seen the retreat of Russia from Kherson but Mr Putin’s track record to date does not suggest a quiet retreat. This, and the possibility of another flicker in the inflation number, requires a degree of caution. However, markets have reacted well; inflation is predicted to be much lower next year in the US, and the outcome of the US midterm elections may prove less disruptive than anticipated.
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