Bank of England says wage-price spiral has taken hold

Bank of England governor Andrew Bailey warned the UK is already experiencing secondary inflation effects as higher prices caused by supply chain disruption and high energy costs have given way to price increases caused by employers needing to cover higher wage costs. The latest UK employment data shows the jobs market remains robust. The employment rate has ticked up slightly as some people who chose to stop working during the Covid pandemic return to employment. Wages continue to rise at a much faster rate than in recent years, as average private sector wages increased by 7%.

Last week, the Bank of England raised its forecast for inflation. It now expects inflation to remain above 5% this year and not to return to target until 2025. Andrew Bailey’s comments this week opened the way for further rate hikes as he promised the bank would raise rates as far as necessary to get inflation back to target. His comments contributed to a decline in gilts as the yield on 10-year UK government bonds rose to the highest level this year.

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(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

Bank of England raises rates

This week there is further evidence of the split emerging between the US Federal Reserve and central banks on this side of the Atlantic. The small decline in US inflation takes the pressure off the Fed as it can argue that it should now be given time to see if its efforts have paid off. Over here the data is far from convincing. GDP growth remains weak, at just 0.1% for the first quarter. Unemployment is very low and wages are rising, but signs of weakness are emerging – particularly in employers’ preference for temporary staff over permanent hiring. As the Bank of England has conceded that inflation will remain higher for longer markets now expect several more hikes before it is ready to pause for reflection.

Elsewhere, big tech companies continue to hype the potential for artificial intelligence. However, the impact is already being felt in sectors like publishing, marketing and advertising as investors grow concerned about its impact. Businesses like Pearson and Relx have spent this week outlining the benefits they see in AI but there is likely significant disruption to other sectors as the potential for this technology is tested.

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• UK: Bank of England hikes by 0.25% as jobs market begins to cool.
• US: Inflation falls but Government debt stand off unsettles bond market
• Equities: Education stocks look for the positive in AI.

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

 

Bumper oil profits BUT crude price falls sharply

BP and Shell both reported very strong updates for the first three months of the year as the energy giants saw profits of $5bn and $9.6bn respectively. As well as reaping the benefit of higher oil prices, BP generated a significant increase in revenue from trading in the international oil and gas market. Shell’s profits were sustained by a big increase in revenue from natural gas production and it promised to use its bumper profits to return cash to investors by increasing dividends and pledging an additional $4bn for share buybacks. BP has slowed the pace of its buyback as the price of oil and gas has been falling in recent weeks.

China’s return to growth was expected to support the price of oil but instead it has fallen steeply. Brent Crude was $82 a barrel at the beginning of January and was as high as $87 in early April, however, fears of recession caused this drop to $72 a barrel this week. This is despite Opec+ countries trying to keep prices high by agreeing a big production cut in April. 

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• Central Banks: Interest rates raised again but Fed signals it is reaching the end of the road
• Global: Interest rates rise, but market expects a pause
• Banks: More turmoil for US regional banks

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

Calls for wage restraint is badly received

This week Bank of England chief economist Huw Pill generated controversy when he said that to break the inflationary spiral people in the UK need to just accept they are poorer and stop pushing wages up. This may be a clear and sensible conclusion to a simple economic problem, but consumers see their falling purchasing power as more than a cold and rational exercise in economic theory. The strong stock market updates from consumer-facing firms show those with strong brands have been able to protect their profits by passing on price hikes in full. This is good news for investors, but when consumers think they are the only ones being asked to shoulder the burden of rising prices the argument put forward by Pill was never going to be well received.

Meanwhile, despite weak consumer confidence, a slowing US economy was propped up by consumer spending remaining robust. Service activity has grown strongly in developed economies but headwinds from rising interest rates and tighter bank lending will further test consumer resilience. 

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• Technology: Return to growth lifts US equities
• GDP: Strong services activity supports weak economic growth
• Inflation – Brands with pricing power able to grow profits

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)