Portfolio management as artistry
6 min read
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The Office for National Statistics revealed in April to June 2023, the annual growth rate for regular pay (excluding bonuses) was 7.8%. This is the highest annual growth rate in regular pay since comparable records began in 2001. Total pay, which includes bonuses, increased 8.2%. The annual rate in total pay was lifted by one-off bonus payments by the government to NHS staff in June. The more recent July numbers from HMRC indicated a slowdown in median pay growth, providing some solace.
Curiously, wage growth figures appear to have coincided with a decrease in labour market strength. Over the three months leading up to the end of May, the UK unemployment rate increased from 4% to 4.2%. This rise is the sharpest since the three months ending in October 2021 and occurred more quickly than the Bank of England had predicted. The Bank of England projected the unemployment rate to remain below 4% until the end of 2024 in its May monetary report. HMRC numbers and a loosening in the labour market may suggest a more cautious stance could be taken with regards to raising rates. However, it’s more likely the Bank of England will remain focused on its mandated 2% inflation target. With consumer price inflation confirmed as 6.8% down from June’s 7.9%, there appears to be a need for a further rate hike.
Although the government cannot directly manage inflation, they understand fulfilling the inflation pledge is important to voters. Election fortunes are closely tied to actions taken by the Bank of England with Jeremy Hunt remarking last week “while prices are slowing, we’re not at the finish line. We must stick to our plan to half inflation this year and get it back to 2%”.
The two-day Federal Reserve meeting concluded with a 0.25% increase in interest rates. The latest increase brings the target range for the funds rate to 5.25% to 5.50%. Minutes emphasised upside risk to inflation remains opening the door to additional hikes. All members were in agreement about the decision to increase rates, although two members suggested it may have been premature.
Last week, market one year since the Inflation Reduction Act was passed into law, aimed at assisting the Federal Reserve in combating inflation. The name has posed a branding challenge with Joe Biden himself admitting “I wish I hadn’t called it that, because it has less to do with inflation than it has to do with providing alternatives that generate economic growth”. The act reflected an inflection point in US climate policy by dedicating $369 billion to clean energy initiatives. While the act may not have reduced inflation over the last year it has made the US an appealing destination for clean tech manufacturing companies due to the range of tax incentives available.
Amidst the coverage of the Federal Reserve meeting and Inflation Reduction Act, numerous reports highlighted remarks from a Fitch ratings analyst. The analyst cautioned if the broader banking industry faces another downgrade, credit ratings of many US banks may need to be re-evaluated.
Gross Domestic Product in Europe expanded 0.30% in the second quarter of 2023. Industrial production increased 0.5% on the month, surpassing expectations for a 0.2% rise and achieved despite falling output in France and Germany.
As China’s economy struggles to find momentum, China’s central bank has stepped in to defend the renminbi. The daily midpoint for the renminbi was set at 7.2006 against the dollar, while the Hang Seng benchmark index closed in bear market territory in the Friday session, more than 20% below its last highs set in January. China unexpectedly lowered its medium term financing rate by 15 basis points to 2.5%, earlier last week. At the time of writing China has announced a similar reduction in the one year loan prime rate by 10 basis points, but has kept the five year loan prime rate unchanged at 4.2%.
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