20 Aug 2019
UK weekly commentary from BlackRock covering week highlights, what we’re thinking about the markets and what your clients may be asking this week.
With signs that inflation is rising across the globe, the BlackRock Investment Institute says investors have grown used to a world of low inflation:
“Low inflation has been a hallmark of globalisation as the world’s productive capacity has increased rapidly. Investors have become used to a world where inflation is low and inflation surprises are almost always to the downside. Inflation has mostly come in below expectations since the 1980s. This has arisen in an environment largely devoid of negative macro supply shocks — such as the oil shocks of the 1970s — that push growth lower and inflation higher. And growth disappointments have tended to come with lower inflation — characteristic of demand shocks.
“As a result, bonds have tended to cushion portfolios during equity selloffs in this period. The risk? Trade protectionism and deglobalisation could unwind some of these benefits over time and serve as a negative supply shock that raises prices, slows productivity growth and lowers economic output — an outcome investors haven’t had to worry about for decades.
“This has important portfolio construction implications. It means that we could see periods of lower growth and higher inflation, pushing bond and equity returns lower. This would reduce the desirability of holding bonds in a portfolio to offset pullbacks in equities. Not all of us are convinced. Another camp believes deglobalisation will force a gradual realignment of global supply chains and the abandonment of manufacturing capacity, leading to disinflation. The debate shows there’s much uncertainty around long-term inflation risks, even if we see them tilted upwards.”
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Source: BlackRock Investor Pulse, May 2019UK gross domestic product (GDP) (Q2): The British economy shrank for the first time in almost seven years in the second quarter. Output fell 0.2%, down from 0.5% growth in the first quarter. Economist blamed slower stockpiling activity and Brexit uncertainty.1
UK wages and unemployment data: Wage growth in the UK reached an 11-year high of 3.9% in the year to June. The number of people employed was at its joint highest since 1971, with 32.81 million people in employment, 425,000 more than a year earlier.2
US inflation: US consumer prices rose 0.3% in July, marginally higher than expectations. The rise was driven by higher fuel and rental costs. Petrol rose 2.5%, reversing a two-month decline.3
German economy: German industrial production suffered its biggest annual decline in nine years, after it was caught in the cross-fire of the escalating trade war between the US and China. It recorded a 1.5% fall in industrial production in June, leaving it teetering on recession.4
1 UK economy shrinks for first time in almost 7 years, Financial Times, August 2019
2 UK wage growth picks up to 11-year high, BBC, August 2019
3 Consumer price inflation rises amid increases in gas and housing costs, CNBC, August 2019
4 German recession fears after big decline in industrial production, Guardian, 2019
UK inflation (July): UK inflation is forecast to rise to 2.2% year on year and 0.2% month on month. There is a danger that the recent fall in sterling starts to push up UK inflation figures.5
UK retail sales (July): Sales are expected to rise 3.2% in July from 3.8% in June. However, recent figures from the British Retail Consortium and KPMG showed retail sales slowing significantly in spite of favourable weather conditions.6
US retail sales (July): Sales are expected to rise 0.3% month on month in July from 0.4% in June. The consumer has generally been a source of strength for the US economy.7
Eurozone inflation: Eurozone core inflation has remained stubbornly low, with risks that the European Central Bank will miss its 2% inflation target over the longer-term.8
5 Week ahead, IG Index, August 2019
6 Department stores suffer in worst July retail sales on record, Financial Times, August 2019
7 Economic calendar, FX Street, August 2019
8 Eurozone core inflation picks up but remains low, Financial Times, August 2019
The opinions expressed are as of August 2019 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.
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