Week ending 21st June 2019.

Global equities rose this week on the prospect of looser monetary policy and the hope that US/China trade talks will soon resume.

Mario Draghi, the ECB President, was very dovish, stating that “if the [financial] crisis has shown [us] anything, it is that we will use all the flexibility within our mandate”.  He also hinted that the Governing Council may be willing to tolerate CPI inflation running above its goal to compensate for the recent period of very low inflation.  This suggests to us that the ECB is nudging closer to announcing new stimulus for the Eurozone economy.

While the Fed left US interest rates unchanged in a range of 2.25% to 2.5% on Wednesday (19 June 2019), policymakers replaced their reference to being “patient” with the term “act as appropriate” in their accompanying statement.  Although the Fed remained optimistic about the outlook (leaving GDP growth for 2019 unchanged at 2.1%), they did admit that inflationary pressures had receded and lowered their 2019 PCE forecast to 1.5% from 1.8%, which is well below their 2% target and opens the door to US interest rate cuts.

Consequently, we have little doubt that Fed policymakers will cut US interest rates at their next meeting in July – it is just a question of whether it is a cut of 0.25% or 0.50%.

Despite the fact that the central banks of the US, Eurozone, Japan and Australia have all shifted their tone towards easier monetary policy, the BoE failed to follow suit.  On Thursday (20 June 2019) the BoE left interest rates unchanged.  While this was expected, they repeated their previous statement that they see the need for higher interest rates.

This is especially surprising given the only economic data worthy of a mention this week showed the need for lower UK interest rates.  UK core CPI inflation (which excludes volatile items such as food and energy) slowed to 1.7% (its lowest reading since January 2017), while UK retail sales declined 0.5% in May, following a 0.1% decline in April.  Given the fact that the UK consumer accounts for around 60% of the UK economy, this suggests that GDP is highly likely to decline this quarter, or at best, flat-line.

This Sunday (23 June 2019) marks the third anniversary of the EU Referendum!  And whether it is Boris Johnson or Jeremy Hunt who is our next Prime Minister, they will confront the same parliamentary problem that ultimately defeated Theresa May:  given the Tories have a minority government, Parliament has the numbers to block a deal and also block a no-deal Brexit.  Consequently, it is likely that they will be forced to call a general election.

Additionally, this coming week we have the Fed’s preferred inflation measure, the PCE, and the G-20 summit in Japan, where Donald Trump and his Chinese counterpart, Xi Jinping, have agreed to meet with each other in an attempt to break the current stalemate and restart trade talks.

Investment Management Team