WeekWatch -‘Pressure is mounting on central banks to show they are not being overly relaxed around inflation’ July 2021
The market growth slowdown seen in recent weeks continued last week, as persistent worries about the Delta variant of COVID-19 flared up and due to doubts around the potential pace of the recovery.
This was compounded by continued high rates of inflation in the UK and the US. In America, Federal Reserve Chairman Jerome Powell on Wednesday sought to calm markets, repeating the message he gave after the last inflation figures: that temporary factors are causing the recent surge in inflation, and that conditions have some way to go before the Fed will change its policies in response.
Despite this, pressure is mounting on central banks to show they are not being overly relaxed around inflation. Gordon Shannon, partner at TwentyFour noted: “While the Bank of England [BoE] continues to espouse their view that this inflation is transitory, we believe its magnitude and timing may introduce some doubt: 2.5% is yet again a breach of their stated 2% target.
“Furthermore, that above-target inflation is occurring relatively quickly in the UK’s recovery (we have only just reached the 19 July ‘Freedom Day’) appears to dramatically increase the chances that the economy will breach the key 3% CPI level. When the BoE misses their inflation target by more than 1%, it must formally explain the cause to the Government.”
Aside from the potential threat of inflation, resurging COVID-19 numbers – driven primarily by the Delta variant – helped reverse some of the recent growth markets have been seeing. In the UK, where over 87% of adults have received the first dose of a vaccine, and 67% have received a second dose, almost 50,000 were testing positive daily by the end of the week, approaching the levels seen at the start of the year.
UK figures are likely to rise in the near future as well. The Euro 2020 Final on 11 July saw large gatherings across England just over a week before the final national restrictions were due to be lifted.
Although other countries are reporting much lower numbers, these figures were also rising. In the US, where approximately 68% of adults have received at least one vaccination, reported cases had doubled since the start of the month, although this was still only in the 30,000s. Major European economies such as France and Germany also saw their numbers increase; although, again, from much lower bases.
COVID-19 cases are now being seen more frequently among the young, so hospitalisation rates and deaths are notably lower than in previous peaks. Even so, the rising number of people needing to self-isolate as a result of contact with someone with COVID-19 is causing economic difficulties for many business (termed the ‘pingdemic’ in the UK).
These pressures have led to market fears around reopening schedules being delayed, stunting the pace of the recovery. The FTSE ended the week down 1.60%, having peaked Tuesday morning. The STOXX Europe 600 fell 1% on Thursday and continued to fall on Friday. Overall, it was down slightly for the week. Meanwhile the US saw its markets fall slightly, with the Nasdaq and the S&P 500 both dropping less than 1%.
The rise in COVID-19 numbers hit certain sectors harder than others, with the STOXX travel sector the worst-performing sector in the index, while energy stocks also recording above-average falls.
Adrian Frost, manager of Artemis’s UK equity income strategies, noted: “When COVID’S variants resume, investors tend to bail out of ‘value’ stocks, including reopening and reflation trades, and pile instead into a handful of ‘growth’ stocks. When the pandemic seems to be abating, they do the opposite. Last week, markets worried about Delta Plus and a weaker economy. So bond yields fell and growth was in fashion. Then on Friday, bond yields rose, and value was back.”
It should, however, be noted that a number of markets, including the S&P 500, Nasdaq and STOXX Europe 600, all remain close to the historic highs they have previously recorded.
Elsewhere, the Chinese economy reported GDP growth of 7.9% compared to a year earlier. Although this was slower than the 18.3% year-on-year growth the prior quarter, this difference was more attributable to the timing of the pandemic last year.
Artemis and TwentyFour are fund managers for St. James’s Place.
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