Money Round Up 18/6/18

Claudia is joined by Jodie this week to run through the latest economic stories that have caught the eye of our investment team

We start this week in the US as the Federal Open Market Committee decided to raise interest rates by 0.25%. The US Federal Reserve’s target range for the federal funds rate now sits between 1.75% – 2.00%, as interest rates in the US have now risen by 0.50% this year.

Policy makers had been bullish around the state of the US economy, maintained by stimulatory fiscal policy. The economy is getting a boost from $1.5trn worth of tax cuts and a $300m federal budget spending increase. Job creation is also improving as unemployment in the US is currently at 3.8%, the lowest since the 1960’s.

With a robust outlook for economic growth, inflation remaining under control and unemployment on a downward trend, officials have increased the number of interest rate rises they expect to occur in 2018 from 3 to 4. The Fed has also signalled that they expect 3 more interest rate hikes in the US next year bringing the fed funds 2019 target rate up to a range of 3.00% – 3.25%.

In terms of outlook, the Fed is trying to provide as much clarity as possible. They announced that they will hold a press conference after every meeting, rather than occasionally. We know from history that central banks are capable of upsetting markets when they spring surprises, hence this is a welcome move. There is a saying that the job of central bankers is to ‘take away the punchbowl just as the party gets going’.

For now, the picture in the US is one of economic growth continuing while inflation is held in check by the gentle tightening of monetary policy.

ECB And Quantitative Easing

The president of the European Central Bank, Mario Draghi, and his colleagues held their first formal talks on Thursday to decide when to end their asset purchasing programme, also known as Quantitative Easing.

The purchase of public and private sector securities bonds injects liquidity into the European banking system allowing financial institutions to make more loans and corporations to invest more.

The ECB confirmed that QE would be extended, but at a lower rate until the end of the year, with the first interest rate increase expected to take place in the middle of next year. It is thought that interest rates will remain the same at their present levels at least through the summer of 2019.

One slightly downbeat aspect was that the ECB cut its forecast for eurozone growth this year from 2.4% to 2.1%. Forecasts further out are unchanged; 1.9% in 2019 and 1.7% in 2020.

UK retail sales bounce back

After a poor start to the year for the UK retail sector, May’s data for retail sales exceeded analysts’ expectations. Results released on Wednesday show sales increasing by 1.3% on the month. On a year on year basis sales are up 4.4%. The announcement of the positive result lead to a 0.5% rise in sterling against the greenback.

Perceptions around the retail sector tend to be negative. The high street is in flux providing a source of negative news for the media. They can gorge themselves on a feast of negativity as businesses such as House of Fraser, BHS, n and M&S shed jobs, or go under.

Recently though the mood has turned more positive. The data suggests shoppers in May were more willing to spend, spurred on by a consistent spell of glorious weather and the nation’s upbeat mood in response to the Royal Wedding celebrations. Aside from these transitory effects economists have a less engaging way of explaining the effect – rising real disposable incomes. This means wages have started to rise faster than inflation, but the trend is in its infancy right now. The most recent data on wage growth and inflation showed the continuation of positive real income growth with figures for the end of May reporting a 2.8% increase in wages, whilst inflation held at the annual rate of 2.4%.

Of course, we are now all familiar with the shifting trends towards shopping online and how it is decimating the traditional bricks and mortar retailers. Behind the scenes traditional retailers are working to enhance their online presence as a way of retaining market share, but for some it is too little too late.

That said, recent upbeat retail sales figures are a positive reflection on the health of the UK economy and point to improving levels of consumer confidence. The good weather cannot be guaranteed, but analysts are expecting strong retail sales to continue in June/July as the world cup kicks off.

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