Article

UK inflation worries the BoE

Last Week in the City, provides a round-up of the market movements and the global investing outlook for the week ending 8 October 2021.

| 12 min read

Last Week in the City

Huw Pill, the Bank of England’s new chief economist, warned that inflation in the UK may be stickier than the central bank currently expects – taking a more hawkish view than his predecessor. Gas prices continue to rise as a global energy shortage continues, with Russian Leader Vladimir Putin being warned by the US not to try and exploit the situation. Mr Putin appeared to be trying to use the crisis to gain leverage in the approval process for the Nord Stream 2 pipeline. The US government also set out its views on its future trade relationship with China.

  • 8% FTSE was up
  • 1.8% FTSE 250 fell

The FTSE 100 was up 0.8% over the week by mid-session on Friday with the more UK-focused FTSE 250 fell 1.8%.

Charles Stanley Radio

We Need To Talk About Investing - Ep. 4: In our latest podcast, Erica and Rob discuss all about Exchange Traded Funds (ETFs).

Investing themes

Covid-19

The travel sector welcomed the latest relaxation of quarantine rules, as 47 countries were taken off the UK’s "red list". Under the latest changes, only Panama, Colombia, Venezuela, Peru, Ecuador, Haiti and the Dominican Republic remain on the list. Travellers from these places arriving in the UK are required to stay in hotel quarantine for 11 nights at a cost of £2,285 for one adult. Transport secretary, Grant Shapps, also said he wants to scrap costly PCR tests for international travellers returning to England in time for the October half-term holiday.

Economics

The Bank of England’s new chief economist Huw Pill warned that inflation may be stickier than the central bank currently expects, as he took a more hawkish stance than his predecessor. “Over recent months inflation has surprised to the upside, UK activity data have disappointed somewhat, while the labour market has tightened. This combination has all the hallmarks of an adverse supply shock,” Mr Pill said. “The rise in wholesale gas prices threatens to raise retail energy costs next year, sustaining CPI inflation rates above four per cent into 2022 second quarter.” Mr Pill’s first public remarks are likely to strengthen expectations the bank will start tightening conditions soon.

We look at a world struggling with supply shortages in this article.

Other authorities around the world are starting to tighten financial conditions, moving away from their ultra-accommodative stance during the pandemic.

  • New Zealand became one of the first developed economies to reverse rate cuts put in place during the pandemic. The Reserve Bank of New Zealand (RBNZ) raised interest rates for the first time in seven years as it tries to rein in property prices and inflation to 0.5%. The RBNZ also said it plans to remove more stimulus measures as the economy continues to recover.
  • Australia’s prudential regulator tightened lending rules in the housing market citing concerns about household indebtedness in the low-interest-rate environment. The Australian Prudential Regulation Authority raised the interest rate buffer banks should use when considering new mortgage applications.

German manufacturing orders fell more than expected in August, after a strong increase in July. Orders declined 7.7% month-on-month following a revised 4.9% increase in July, according to data from federal statistics office Destatis. This was much worse than consensus expectation for a 1.5% fall.

Geopolitics

Unveiling the results of a "top-to-bottom" review of America’s trade policy with China, US Trade Representative Katherine Tai said she would reopen talks with Beijing soon, with “all options” kept open. Action points included:

  • Tackling Beijing over its failure to keep promises made in “Phase 1” of a trade deal struck with Donald Trump’s administration in January 2020, including a shortfall of promised US goods purchases.
  • No separate "Phase 2" talks to tackle issues such as massive subsidies to domestic industries, as envisioned by Donald Trump. Instead, these issues – including state subsidies for its semiconductor, steel and other industries – will be part of the general dialogue between Washington and Beijing.
  • Keeping the prospect of further tariffs under the “Section 301” trade law on the table depending on the actions of Beijing.
  • Continuing the adjustment of US supply chains away from China. The Biden administration is “prepared to deploy all tools and explore the development of new ones, including through collaboration with other economies and countries” to ensure security of supply.
  • Addressing China's "non-market" behaviour by working with other major democracies.
  • The exclusion of certain imports from punitive tariffs. US industry has argued some of these Chinese exports were “essential” and said tariffs had combined with shipping issues to increase costs for American businesses. More than 3,500 companies – including Coca-Cola, The Walt Disney Co and Ford have filed lawsuits against the Trump-era tariffs at the US Court of International Trade.

US senators agreed a deal on a short-term increase in the debt ceiling. While the deal is good news for markets worried about an imminent default, it only moves the problem out to December when the drama and brinksmanship may run again.

Commodities

Gas prices continue to rise this week. Market regulator Ofgem warned that households will again see "significant rises" in energy prices next spring. Its chief executive, Jonathan Brearley, said the price cap, which limits how much energy providers can charge per unit, would go up again because of the "unprecedented" rise in gas prices. The cap is revised twice a year and is next due to be changed in April.

The US warned Russia not to exploit the gas crisis. President Vladimir Putin previously indicated that Russia might boost supplies, but some analysts doubt that this will ever happen as storage is low in the country following an exceptionally harsh winter. Russia appears to be using the crisis as leverage to get its controversial Nord Stream 2 pipeline approved.

Chinese officials ordered more than 70 mines in Inner Mongolia to ramp up coal production by nearly 100 million tonnes, as the country battles its worst power crunch and coal shortages in years. The country had been moving away from coal generation to meet climate targets.

BHP, the world’s largest listed miner, said it would look at operating in “tougher jurisdictions” as it focused on “future facing” commodities needed for the energy transition away from carbon. These include copper, used in electrical wiring, and nickel, which is used in batteries. Reports suggest the group is currently in discussions with billionaire Robert Friedland’s Ivanhoe Mines about buying a stake in its large copper project in the Democratic Republic of Congo.

Technology

Facebook harms children and is damaging democracy, according to whistleblower Frances Haugen. Speaking at a congressional hearing, the former employee of the social-media group said it put “astronomical profits before people” and said the company did not have enough staff to keep the platform safe. She said Facebook was “literally fanning” ethnic violence in developing countries and that the “buck stops” with founder and chief executive Mark Zuckerberg. Ms Haugen said there should be more scrutiny of the tech giant’s algorithms, which shape the content delivered to users. Mr Zuckerberg has hit back at the testimony. “At the heart of these accusations is this idea that we prioritise profit over safety and wellbeing. That’s just not true,” he said. “The argument that we deliberately push content that makes people angry for profit is deeply illogical. We make money from ads, and advertisers consistently tell us they don’t want their ads next to harmful or angry content,” Mr Zuckerberg added.

A crackdown on the technology industry in China continues to take its toll. An index tracking China’s top technology stocks - the Hang Seng Tech Index – closed at record lows. There have been crack downs by Beijing on raising capital and listing in the US, as well as moves against anti-competitive behaviour. There are bans on the use of algorithms, fake reviews and inappropriate use of data. The index is down by almost a third in the year to date. We look at China’s shift against capitalism in this article.

M&A

US private-equity group Clayton, Dubilier & Rice (CD&R) won the auction to take over Wm Morrison, the UK's fourth-largest supermarket group with a £7bn bid. CD&R's victory was announced by the stock market's Takeover Panel and is slightly higher than the 285p-a-share offer that was recommended by Morrison's board in August. The board is now expected to recommend shareholders accept the new offer at a meeting set for 19 October. CD&R is paying a 61% premium to the supermarkets undisturbed share price. Following the conclusion of the auction, takeover speculation has now shifted to larger rival J Sainsbury.

Private-equity groups are offering the highest premiums for listed companies in more than two decades, according to data provider Refinitiv. In some cases, private-equity firms are paying as much as 70% above the undisturbed share price, but the average premium for the takeover of UK companies in 2021 so far is 47%, in Europe 45% and the US average premiums have hit 42%.

Environmental, Social & Governance (ESG)

Expectations for COP 26, the United Nations Climate Conference in Glasgow next month, have been running high. It is meant to be the conference which translates general net zero agreements into a set of plans and targets. We look at what COP 26 means for the global green transition in a recent article.

Autos

UK new car registrations fell to their lowest September levels for more than two decades, according to the Society of Motor Manufacturers and Traders. New registrations dropped 35% compared with September 2020, but the trade body noted sales of electric cars were rising rapidly. More than 32,000 electric cars were registered in September, almost as many as registered in the whole of 2019 (37,850).

Retail

The combination of soaring energy costs and supply-chain disruption will result in price rises at UK supermarket checkout counters, the managing director of frozen food retailer Iceland said. “It is inevitable that we will see price rises,” Richard Walker noted in an interview. “The UK supermarket industry is one of the most competitive in the world, our margins are very tight and we’re not an endless sponge that can just absorb all of these different cost increases,” he said.

Amazon will open its first non-food physical store outside the US at the Bluewater Shopping centre near Dartford. Called Amazon 4-Star, the store will sell around 2,000 of the online retailer’s most popular and best-rated products. There are already more than 30 Amazon 4-star outlets in the US.

Sales and profits at Tesco grew more than expected in the first six months of 2021, but noted the sales surge could now start to "fall away". However, management upped its full-year profit guidance and noted its supply-chain was “resilient”.

Greggs said disruption to supplies caused by HGV driver shortages had impacted recent trading. The High Street baker also said the price of ingredients and supplies was rising, but management will accelerate its store openings to 150 a year. This is part of an "ambitious" target to double turnover over the next five years to about £2.4bn.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

UK inflation worries the BoE

Read this next

Two funds for investing in India’s ‘stealth’ bull market

See more Insights

More insights

Article
Omicron and hawkish Fed concern markets
By Garry White
03 Dec 2021 | 6 min read
Article
Do countries have too much debt?
By Charles Stanley
03 Dec 2021 | 6 min read
Article
Why markets have fallen
By Charles Stanley
01 Dec 2021 | 4 min read
Article
New Covid-19 variant hits travel and markets
By Garry White
26 Nov 2021 | 7 min read