Market Update – 19th May.

20th May 2021

Last week’s inflation theme remains front and centre of attention – and unfortunately, that has hurt global equity market sentiment.  Adding to the negative vibe was news that Taiwan was introducing new restrictions given rising coronavirus cases there and across many parts of Asia.

While inflation and coronavirus worries will undoubtedly keep equity market volatility elevated in the short-term, putting the humanitarian impact of the latest increase in coronavirus cases to one side, the overall outlook remains very positive.

For example, here in the UK, yesterday’s (Tuesday 18 May 2021) employment data was much stronger than expected, with an increase of 84,000 people in employment during the first quarter of 2021.  Not only was this the first increase in employment since last March, but this increase in employment reduced the unemployment rate to 4.8% – which is less than 1 percentage point higher than it was before the coronavirus outbreak.

Although it can be argued that the government’s job retention (furlough) scheme has flattered the UK’s unemployment readings, data from the Office of National Statistics (ONS) on Thursday 6 May 2021 showed that as coronavirus restrictions continued to be lifted, the proportion of businesses’ workforce on furlough fell from 17% in late March 2021 to 13% by mid-April 2021– and we would hope that many more people on furlough have been taken off this week as pubs and restaurants were allowed to serve customers inside.  Consequently, we may see the unemployment rate fall further next month and peak at a much lower rate than we all thought possible this time last year, when the furlough scheme fully unwinds at the end of September.

As for this morning’s UK CPI inflation reading, the increase from 0.7% to 1.5% was fully expected – and as with the sharp jump in US CPI inflation we discussed last week, there are plenty of reasons to look past today’s reading.  As we have previously explained, ‘base effects’ were the primary cause as the price declines we experienced in 2020 drop out of the reading’s calculations.  For example, last year’s petrol pump price declined dramatically when the oil price fell into negative territory; while Ofgem’s price cap increase has lifted our household energy costs this year, having reduced them last year.

As a result, while we will undoubtedly see UK CPI inflation rise above the BoE’s 2% target in the coming months, we don’t believe the BoE will react by increasing UK interest rates.

Given the market’s current obsession with inflation, our attention is now fully on this evening’s (7pm UK time) release of the minutes from the Fed’s last monetary policy meeting (which was held on 28 April 2021) – fingers-crossed there will be sufficient and soothing references to the fact that the current rise in inflation is transitory, to finally put the markets’ concerns to bed.

Investment Management Team