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The Fed’s inflation debate continues

Last Week in the City, provides a round-up of the market movements and the global investing outlook for the week ending 18 June 2021.

| 6 min read

Last Week in the City

The US Federal Reserve’s policy-setting committee increased its inflation expectations, as the debate over the “hot” US economy continues. The official policy remained unchanged, with the central bank’s Chair Jerome Powell insisting any rise would be temporary.

China ramped- up efforts to cool the recent surge in commodity prices, releasing supply from its strategic-metals reserves. The UK also signed its first post-Brexit trade deal – with Australia.

The FTSE 100 up 0.2% over the week and the FTSE 250 down 0.6% by mid-session on Friday.

UK equities recovering from underperformance: For those heavily invested in UK equities in recent years, it has been a frustrating time, but Jon Cunliffe, Charles Stanley’s Chief Investment Officer, explains why this is changing.

Investment themes

Covid-19

UK Prime Minister Boris Johnson delayed his plans to lift most remaining Covid-19 restrictions by a month because of the rapid spread of the more infectious Delta variant. The “roadmap” out of the pandemic proposed lifting most social restrictions on 21 June, with pubs, restaurants, nightclubs and other hospitality venues fully reopening. This was pushed back to 19 July. The vaccination programme will be speeded up in the interim.

Retail sales in the UK fell 1.4% between April and May as people chose to visit reopened bars and restaurants instead of buying food at supermarkets as restrictions on social movements were eased. Sales at non-food shops rose on demand for outdoor furniture. The proportion of online sales dipped as people returned to physical shops.

Tesco, Britain's biggest retailer, reported a sharp slowdown in underlying UK sales growth in its first quarter, reflecting a tough comparison with the same quarter last year when consumers stockpiled in the country's first Covid-19 lockdown.

Economics

The US central bank brought forward its projection for an interest rate hike into 2023, as members of its policy-setting committee raised its inflation expectations. We look at the Fed and the battle over US inflation, we look at the Fed's view of inflation is changing in our recent article.

UK inflation jumped to 2.1% in May, breaching the Bank of England’s 2% target for the first time in two years. The increase was ahead of consensus view of 1.8%. The price of fuel was one of the main drivers of May’s increase, soaring by almost 20% from last year to push the rate of inflation up from 1.5% in April.

There was a record rise in the number of workers on British payrolls in May, as the jobs market continued to recover. The Office for National Statistics (ONS) said there were 197,000 more people in pay-rolled employment last month compared with April, the highest rise since records began in 2014.

The UK signed its first post-Brexit trade deal with Australia, but full details are yet to be released. “Our new free trade agreement opens fantastic opportunities for British businesses and consumers,” Boris Johnson said, “as well as young people wanting the chance to work and live on the other side of the world.”

Data from China was weaker than expected. Growth in China’s factory output slowed for a third straight month in May, weighed down by disruptions caused by Covid-19 outbreaks in the country’s southern export powerhouse of Guangdong. China’s retail sales and investment growth also came in below market expectations, but analysts say underlying activity still looks quite solid.

Geopolitics

European Union attempts to tone down US action against China at the G7 Summit means the “Five Eyes” grouping of Australia, New Zealand, Canada, the UK are emerging as the principal supporters of the US. We look at this emerging geopolitical force in our recent article, It's a Five Eyes world competing with China.

The UK, US and EU agreed on a truce in a 17-year trade dispute over subsidies for Boeing and Airbus. Under the agreement, all sides will remove taxes on $11.5bn (£8.2bn) of goods, including wine, cheese and tractors, for five years. Those tariffs, imposed by both sides in the lengthy dispute, had already been suspended in March while they tried to resolve matters. This included a five-year suspension of the tariffs on Scotch whisky, which were estimated to have cost the industry more than £600m in lost exports.

IPOs

Shares in online furniture retailer Made.com ended their first day of trading almost 4% lower in London. The company had priced its initial shares offering at 200p each, valuing it at up to £775.3m. Management said the money raised from the float will allow it to "accelerate" growth.

Environment, Social and Governance (ESG)

More than 200 companies are in danger of being thrown out of a family of FTSE Russell indices for failing to meet stricter environmental standards. The 208 companies represent 13.5% of the 1,546 stocks in the FTSE 4Good index series, which is designed to measure the performance of businesses with strong ESG practices.

Emissions associated with heating domestic and non-domestic buildings (excluding industry) were responsible for 23% of the UK’s emissions in 2016. Garry White looks at the cost of reducing these emissions in his recent article, Are net-zero targets affordable?

Mining and commodities

The price of many commodities fell sharply as China, the world largest consumer of basic resources, made some major moves to stop the recent rally in its tracks. Beijing said it planned to release some of its stockpiles of copper, aluminium and zinc to stabilise the price surge. The country has not released metals from its stockpiles for about a decade. It has also urged domestic companies to reduce commodity trading in overseas markets.

Technology

The UK's Competition and Markets Authority (CMA) confirmed it is investigating the "effective duopoly" Apple and Alphabet-owned Google have in the mobile-phone market. The probe includes the operating systems Android and iOS, both app stores, and the Safari and Chrome web browsers.

Charles Stanley Radio

The Technological Revolution: What is it and why does it matter? In this podcast, two of our Investment Managers discuss the current technological revolution and what benefits it has offered.


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The Fed’s inflation debate continues

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