So here is the conundrum – or is it a joke? Consumer confidence has fallen since the Brexit vote, yet consumer spending grew in July. The GfK survey for the first half of July indicated that consumer confidence was falling at the fastest monthly rate since March 1990. So, the theory goes that if you are worried about your job, worried about finances, worried about the general outlook, you hunker down and don’t go out to eat; you don’t buy that last mojito.
The great British public are made of sterner stuff. We laugh in the face of impending economic doom. The British Retail Consortium/KPMG figures published today show that consumer spending in July has risen 1.1 % on a like-for-like basis. Ever authoritative, after robust analysis KPMG attributed the good mood to sunny weather. Let’s hope it doesn’t rain.
The Bank of England will hope that its decision to drop interest rates to 0.25% and its huge stimulus package will further boost consumer and household spending – the engine room behind the British economy.
The market had largely been expecting the drop in interest rates; less certain were the measures that would accompany it. However, Mark found his bazooka and made sure that it was fully loaded. As well as the first interest rate cut since 2009, there was the commitment to buy £70bn in government and corporate debt and a £100bn scheme to help banks borrow at cheaper rates. But the governor has ruled out negative rates and stated that there is a limit to what monetary policy can do alone, putting pressure on the government to be similarly proactive.
Saying that, it is unlikely that anything significant will be announced until the autumn statement, when Philip Hammond will no doubt outline what he means by ‘resetting the government’s economic policy’. No doubt Her Majesty’s opposition will hold him to account… well they would if they weren’t such a disgraceful basket case. Don’t worry, John Macdonald could lend Hammond one of his forward-thinking (sorry, I should say ‘progressive’) economic manuals to point him in the right direction.
Where has this left the market? Immediately after the announcement, equities were up, yields on government and corporate bonds sank, and the pound fell. Global markets have surged this week off the back of positive US job figures, which showed that more jobs had been created than forecast and that average wages have slightly increased. There are still concerns around global stagnation and increased calls for investors to look at emerging markets for decent returns.
For me, a top US hedge fund has aptly described the state of global equity markets at the moment: TINA – ‘there is no alternative’. Markets are in a bizarre hold of historically low interest rates, low macro growth and the prospect of higher inflation potentially to come. The key areas of concern where they point the finger are:
- US treasuries are the wrong price
- Investors have ‘bypassed growth and moved to risk-parity, frankly a shameless abrogation of any equity-fundamental analysis replaced by the bond proxy’
- The valuation of the stock market is being set by unreliable price indicators such as bonds
- We have witnessed mania around helicopter money, the recession and the fatuous concept of negative rates
Are they right? Well, their fund has posted year to date returns of 11% where many competitors are in negative territory. Regardless of what your opinion is on the over/under valuation of the equity market, it certainly can’t be right that ‘licence to print money’ quantitative easing is continually being used as a legitimate tool in policy-makers’ fiscal tool kit.
My advice is buy gold, buy that new handbag, buy that new car and, of course, have one last mojito!