There has been a lot of negative economic news in the media this week about the markets and I thought it would be a good idea to provide an update that I hope you will find useful.
United States Economy Shrinks
The markets were caught off guard by disappointing figures released this week that showed the US economy dropped by an annualised 1.4% in the first quarter. Analysts had widely forecast a 1% rise following the surge of 6.9% in GDP in Q4 last year, so the reported figures fell far short of expectations. It was the first contraction in the economy since mid-2020 during the height of the pandemic.
The leading cause of the decline was a widening trade deficit, which peaked in March following a surge in imports and a fall in export volume. The US government attributed the decline to ‘technical factors’ and emphasised that the American economy ‘continues to be resilient in the face of historical challenges’. The President supported his contention, pointing to strong consumer spending, which rose 2.7%, up from 2.5% in Q4 21.
Eurozone – slowing growth
European growth slowed in Q1, falling to just 0.2% of GDP, lower than the 0.3% forecast by the EU. Germany’s GDP grew by 0.2%, France stagnated, and Italy’s declined by 0.2%.
Taming Inflation
The United States Federal Reserve announced a widely expected rise of 0.5% in interest rates this week. It is the biggest increase in two decades to try to bring inflation under control. Analysts predict further increases later this year.
The Bank of England raised their rates by 25 basis points in the UK. A minority of the Monetary Policy Committee wanted to follow the Fed’s lead and voted for a 0.5% rise; they were defeated 6-3.
The European Central Bank is holding Euro interest rates for the moment. However, with inflation running at 7.5% in the Eurozone, ECB board member Isabel Schnabel warned that a rate rise was on the cards in July.
The Fed tightening & targeting inflation
Figures released in the US confirmed that the Consumer Price Index hit a 40-year high as inflation reached 8.5% in March. The indication from Federal Reserve Chair Jerome Powell is that the Fed will aggressively tackle inflation, and this was confirmed with a half-point interest rate increase in the previous FOMC meeting. Markets were temporarily supported by comments from Jerome Powell, which revealed the central bank wasn’t considering even bigger increases, eg 75 bps hikes. Powell is attempting to engineer a soft landing – in which interest rates are raised just enough that it doesn’t cause a recession.
The US will also reduce its monetary stimulus programme, shrinking its balance sheet by US$95 billion a month.
One immediate impact was a rise in yields on US Treasuries. 10-years bonds are up to 2.9%, up from a low of .52%in July 2020.
Review & Reposition
The world economy is still battered and bruised from the pandemic. It now has to absorb a highly disruptive war and fiscal tightening by central banks. It is a clear signal that the market environment has changed, and wise investors should review their portfolios as a result.
It is a daunting environment, but where there are challenges, there are also opportunities. We are already helping our clients review and adjust their portfolios. Those with excess cash savings can avoid erosion by investing in growth opportunities that outpace inflation.
Our upcoming webinar with award winning fund managers Smith Williamson will look at the fundamentals of investing in the current environment, if you would like to join us please register here.
Or if you prefer a personal review of your portfolio or just a second opinion, please book a call. and we can help you successfully navigate these choppy economic waters.
Live Webinar
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May 24 – 4pm UAE (GMT+4) Register
