MARKETS & INVESTING
HOWEVER , HOW LONG INTEREST RATES REMAIN AT THE PEAK IS PROBABLY MORE IMPORTANT THAN THE RATE ITSELF .
Non-stop action The summer provided the usual flurry of economic data , but , rather contrary to the recent past , much of it has been rather positive . This was particularly the case for the UK , which was even more unusual . In the middle of July , the announcement of the Consumer Price Index for June showed that the rate of inflation had slowed faster than expected and was back to a level not seen for 12 months . In July , it slowed further , but not quite as fast as had been hoped for as wage growth remained strong ; nonetheless , good news . Later in July , the IMF ( International Monetary Fund ) upgraded its forecast for global economic growth for this year . They had been notably negative on the prospects for the UK previously , but that view changed and they moved to predict modest economic growth in the UK rather than a contraction in the economy . Whilst this is an improved outlook , we should remember that headline inflation in the UK is still running at 6.8 %, and core inflation , which strips out food and fuel , as well as some other goods , is running at 6.9 %. It was therefore unsurprising that the Bank of England opted for another 0.25 % on interest rates at their meeting on 3 August . In the accompanying statement , the Bank commented that interest rates would carry on up if needed . But it does feel like we might be at or near the peak . However , how long interest rates remain at the peak is probably more important than the rate itself . The longer the period , the longer the pain for consumers and companies alike .
On the other side of the pond and over the Channel Elsewhere , the economic news is improving . It is important to factor into our thinking the concept of ‘ policy lag ’, which is how long it takes for changes in interest rates to take full effect on inflation and the rest of the economy . Simply , we do not yet know the impact of all the increases so far . It has been a fine balancing act for the central banks , such as the Bank of England , in their attempt to beat inflation , whilst avoiding recession in the economy . As it stands , it looks like the US Federal Reserve Bank might be pulling off what few people thought it could : getting inflation down to acceptable levels whilst keeping economic growth robust . The latest data showed that the US economy grew more than expected in the second quarter of the year , whilst inflation has fallen sharply from its peak . Of course , given what I said above , that cannot be taken for granted just yet , but interest rates do look like they may well have peaked on the other side of the pond , after the 0.25 % increase in July . Over the Channel , it is not quite as clear cut . Inflation remains an issue and the European Central Bank ( ECB ) may have to put interest rates up further after matching the move in the US in July . There is another inflation data release before it meets again in September to discuss interest rates , so it will be clearer if inflation is moderating . Overall , there is room for optimism on the economic outlook , as we move through the cycle . But we are not out of the woods yet !
Movers and shakers If you will forgive me , I am going to reiterate something I wrote in a summary of market moves in July , as I think it does bear repetition . Financial markets have largely been driven by macroeconomic data for some time now , certainly since the advent of the Covid pandemic and arguably since the global financial crisis in 2008 . By that I mean the prices of bonds , equities ( company shares ) and other asset classes have reacted to data on inflation , employment , economic growth , interest rates and similar factors , rather than , for example , a company ’ s share price being mainly impacted by its profitability or business conditions , otherwise called ‘ fundamentals ’. Markets in different asset classes have moved quickly and sizably , in other words they have been volatile as investors buy and sell in reaction to data and news flow . This takes place across large elements of the different asset classes . July proved to be a microcosm of that feature . To give an example of that , the UK ’ s FTSE 250 Index is made up of the next largest 250 companies below the FTSE 100 Index ( the largest 100 ). It contains a number of property companies and investment companies , and is often considered to be reasonably reflective of the UK economy and stock market . The index started August at 18417 and fell to 17916 ( a fall of 2.7 %) before rising to 18618 ( a rise of 3.9 %) the day before the UK inflation data was announced . The positive inflation data and resulting moderation in expectations for interest rate increases led to the FTSE 250 Index jumping to 19322 on the day ( a big jump of 3.8 %). It ended the month very slightly lower . I could give many examples of big moves in a short space of time like that , in many stock markets and bond markets around the world over the recent past . It makes investment decision-making tougher , but very importantly , means that focussing on the long term is crucial . It is easy to get whipsawed in the short term and that can be expensive . It also shows that there are differences within asset classes . The FTSE 100 Index , which is much more international by nature , only rose by a little more than half as much as the FTSE 250 Index .
The Apple of our eyes I rarely write about individual companies , but I think it is worth commenting on Apple , the largest company in the world . First of all , it is a great company , it ’ s not possible to reach such great heights otherwise . But the company announced on 3 August that it had suffered the third straight quarter of declining sales and predicted similar for the current quarter , which would be the worst run of sales declines in 20 years . We shouldn ’ t feel too sorry for the company though , as total revenues came in at $ 81.8 billion for the three-month period . However , Apple is one of the much talked about ( including in these notes ) large US technology and communication companies that have driven the US stock market higher and higher , leaving the vast majority of other companies ’ share prices lagging . Not only has the share price risen , but it has also become more
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