Overview

Faltering growth across most of the world was the clear theme of the month as supply chain issues and the spread of the Delta variant impacted major economies.

That said, it was impossible for the US and UK economies to continue to expand at the rate they had been and so some measure of slowdown was expected at some point.

Indeed, both the US and UK economies improved at one of the strongest rates in the last 5 years.

The other major theme during August was the continued inflationary pressures being felt by companies as a result of supply shortgaes.

Inflation in the US remained at a 13 year high of 5.4%.

Surprisingly, however, the UK inflation rate fell back to 2%.

In terms of financial markets, over the last 6 months the FTSE 100 returned 10.59%, the S&P 500 returned 16.49%, whilst the Euro Stoxx 50 returned 14.74%.

The Japanese Nikkei 225 returned -5.31% over the same period.

The broad emerging markets index returned -2.67% in US$ terms.

The benchmark 10 year Treasury yield rose slightly during August but has still fallen quite significantly since April.

US Economic News

The latest industry surveys from the US pointed to quite a sharp fall in the pace of growth compared to last month, particularly in the services sector.

The change in momentum was partly blamed on the spread of the Delta variant of the Coronavirus and partly on supply chain issues.

Businesses continued to complain that they couldn’t keep up with demand because of supply shortages and also struggled to recruit staff.

There is some evidence to suggest companies are paying higher wages to attract employees.  

Investors will be watching wage growth closely as consistently strong wage growth could be the difference between inflation being short-term and more persistent.

The biggest event of the month where investors are concerned was the annual Jackson Hole meeting of economists and Central Bankers, and in particular Jerome Powell’s (the Chairman of the Federal Reserve) speech.   

Many are looking for clues that the Federal Reserve is becoming concerned with inflation and may be forced to cut back on its stimulus measures.

In actual fact Jerome Powell was fairly sanguine on the issue of inflation and gave no indication that the Central Bank may change policy in the near future.

Meanwhile the headline rate of inflation remained at a 13 year high of 5.4%, despite some expecting a slight fall.  

UK Economic News

The UK economy lost momentum during August as companies struggled to meet demand because of supply chain issues.

In fact one survey suggested that supply problems are the worst they have been since at least 1998.

Companies in the services sector took on workers at one of the fastest rates on record but this was still not enough to prevent backlogs of work increasing.

As a result growth across the economy as a whole is estimated to have been the weakest in 6 months.

However, there was some evidence that the slowdown is more than simply supply chain issues as retail sales growth came in well below expectations.

This may suggest that the UK consumer is beginning to feel less optimistic about their finances than they were in the Spring.

Elsewhere there was something of a surprise when the rate of inflation fell back to 2%, which was lower than most commentators had expected.

Whilst the majority of the Monetary Policy Committee (MPC) appear content that inflation will prove ‘transitory,’ there has been several dissenting voices in recent months.

During August it was announced that the new Chief Economist of the Bank of England is Huw Pill – someone who is seen as keen to keep inflation under control.  

Eurozone Economic News

The Eurozone economy is several months behind the US and UK in terms of recovery and as a result the region’s slowdown has so far not been as pronounced.

Whilst the rate of growth is estimated to have slowed marginally, the economy still improved at the second-fastest rate in the last 15 years (according to surveys).

As in the case of much of the wider world, however, supply chain disruptions and cost increases were a feature during the month.

In fact companies reported costs increasing at one of the fastest rates in 20 years.

In an effort to meet demand firms took on new workers at an historically strong rate.

The unemployment rate across the region fell to 7.6% compared to 7.8% in the previous month.

Wider Economic News

The Chinese economy continued to look lacklustre during August.

The country has experienced a recent outbreak of the Delta variant and the aggressive response from the authorities has led to significant economic disruptions.

The huge manufacturing sector is estimated to have contracted for the first time since the first wave of the pandemic in April 2020.

Elsewhere the Japanese manufacturing sector continued to improve but at a weaker pace than in previous months.

Financial Markets and Corporate News

Whilst global growth seems to be slowing, equity markets appear relatively sanguine and most stock markets continued to make gains during August.

Over the last 6 months the FTSE 100 returned 10.59%, whilst the Euro Stoxx 50 returned 14.74% and the US S&P 500 returned 16.49% (total return).

The Japanese Nikkei 225 returned -5.31%.

The broad emerging markets index returned -2.67% in US$ terms.

The 10 year Treasury yield rose slightly during August but still remains significantly lower than it was back in April.

The Investment Association (IA) UK Gilts sector returned 4.20% over 6 months, whilst the IA Sterling Corporate Bond sector returned 2.95% and the IA Sterling High Yield sector returned 3.13%.

Source: FE Analytics

 Summary of Key News:

• Most economies of the world are accelerating at a solid rate.
• However, momentum has slowed in some economies.
• Stretched supply chains across the world are constraining output.
• US inflation remained elevated whilst UK inflation fell back slightly.
• UK retail sales growth came in well below expectation.
• The Chinese economy weakened as the authorities looked to control the Delta variant.

Financial Markets:

• Over 6 months the FTSE 100 returned 10.59%, the Euro Stoxx 50 returned 14.74%, and the S&P 500 returned 16.49% (total return).
• The Japanese Nikkei 225 returned around -5.31% (total return).
• The broad emerging markets index returned approximately -2.67% (in US$ terms).
• The   IA UK Gilts    sector    returned 4.20% over 6 months, whilst the IA Sterling Corporate Bond sector returned 2.95%, and the IA Sterling High Yield sector returned 3.13%.

Outlook

Although it was inevitable that the pace of the economic recovery would slow  down at some point, the abruptness of the change has taken some people by surprise.

Arguably the key question is whether this slow down can be purely laid at the feet of supply chain disruptions, which will get better in time, or whether the recovery is fundamentally weaker than first thought.

To date investors seem less worried by the economics and more by what it means for Central Bank policy.

Equity markets rose after Jerome Powell’s Jackson Hole speech, which was interpreted as playing down the chances of reducing stimulus measures until the end of this year. 

Even so, with companies across the globe facing historically high cost pressures, the issue of whether Central Banks should be moving faster on curbing inflation is likely to remain in the spotlight.

This opens the door to a situation where any comment by a policymaker which merely hints at a change in policy could move markets quite significantly.  

More broadly, the extremely low interest rate environment has meant that relatively high stock market valuations can be supported.   

If Central Banks are judged to have ‘jumped the gun’ in terms of raising interest rates then this could mean that stock market valuations are no longer justified.