Weekly Market Update

17/07/2017

Equity markets gathered pace last week with bullish sentiment being underwritten by signals from the US Federal Reserve that the pace of monetary policy tightening would be gradual. A rate hike in December is no longer looking like a foregone conclusion. Janet Yellen explained that the US central bank was not constrained by a set timetable for tightening monetary policy and that rate rises could be postponed if inflation remained low. With weaker retail sales and lower inflation figures there is some evidence that the consumer is starting to weaken.

While talks gather over US interest rates and their ability to reverse stimulus measures, Canada acknowledged a shift in monetary policy in response to better global economic growth. The nation raised interest rates for the first time in nearly seven years as their economy is approaching full capacity while their inflation target remains on track. They are not alone with several other central banks including Sweden, adjusting the language used, as conditions have improved.

In the UK, the unemployment rate fell to 4.5 per cent, a level last seen in 1975, while wages expanded by 2 per cent in the three months to May, up from 1.7 per cent in April. However, with inflation getting closer to the 3 per cent mark, real wage growth remains negative and will act as a headwind on growth.

However, the falling unemployment rate will raise hopes that this will have an upward lift on wage pressures. Given the political challenges, and more importantly the effect of digitalisation, there may be some disappointment on this front, keeping interest rates at lower levels.

In bond markets, investors sounded a vote of confidence in the UK’s long-term economic outlook with £15bn of demand for a negative-yielding 40-year index-linked gilt. The issue was strongly supported by domestic investors, who bought 89 per cent of the bond. This was very heavily oversubscribed, showing a lot of confidence in the funding position of the government and the economic outlook.

Elsewhere, the Chinese economy expanded by 6.9 per cent over the second quarter, year on year, which was comfortably above the government’s annual target of 6.5 per cent. The figures from the National Bureau of Statistics also highlighted higher retail sales growth of 10.4 per cent, up from 10 per cent in the first quarter, and a healthier stream of private sector investment, up 7.2 per cent to 17trn yuan.

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