Wealth Watch - 16/07

Stock Take

Speculation over the timing of interest rate cuts has been dominating global markets this year. Last week was no different, as investors continued to guess when policymakers will feel they’ve brought inflation under control.

So, all eyes were on US Federal Reserve Chair, Jerome Powell, as he gave his two-day testimony to Congress. Whilst stressing that he didn’t want to send any signals about the timing of future interest rate moves, Powell told lawmakers that the US was “no longer an overheated economy”, with a job market that “appears to be fully back in balance”.

Figures released on Thursday suggested that the Fed may indeed be on the last lap in its fight against inflation. The US Labor Department reported that US inflation cooled to its slowest pace in a year in June – the third month in a row that inflation has fallen. Prices actually dropped 0.1% between May and June – the first outright monthly decline in years – to register an annual rise of 3%.

The news boosted bets that the Fed was firmly on the path for a September rate cut, prompting the benchmark MSCI global stock index to hit another record high. Leading US stock indices also recorded new highs, although they were dented somewhat by an underwhelming start to the second-quarter earnings season. Some of the biggest US banks failed to impress, and food giant Pepsi-Co was one of a number of firms warning that households were cutting back – a potentially worrying sign for a US economy that is so dependent on consumer spending.

Mark Dowding of BlueBay Asset Management believes it unlikely that inflation will fall much further in the next two months, and so will remain higher than the Fed would like to see. “Given the risk of possible upside inflation disappointment, a September ease is not a completely forgone conclusion, and we have seen over the past year when markets have made a mistake in seeking to front-run rate cut expectations too much.”

Overheating isn’t something the UK has had to worry about. Consumer spending contracted in June as the chilly weather prompted shoppers to keep their credit and debit cards in their pockets. Barclays reported that spending in supermarkets had fallen for the first time in two years. The news chimed with recent business surveys and other signs of slowing growth, underlining the challenge facing the new Labour government, which has made improving economic growth a top priority.

However, this was followed by news from the Office for National Statistics that the UK economy expanded by a faster-than-expected 0.4% in May, boosted by strong performance from the retail and construction industries. Although not too much weight should be put one month’s data, economists suggested it reduced the chances of the Bank of England’s (BoE) Monetary Policy Committee cutting interest rates when it meets on 1 August.

Comments from two BoE officials also dampened expectations of an August rate cut. Ahead of this week’s release of the latest UK inflation figures, Chief Economist Huw Pill cited “uncomfortable strength” in services inflation and wage growth and said that the June inflation numbers were unlikely to change the big picture. He was joined by outgoing MPC member Jonathan Haskel, who said he was not yet ready to vote for rate cuts.

Investors consequently reined in their expectations for a cut next month, pricing in a 50% chance compared to 62% before Pill’s comments.

European markets were also boosted by the feel-good factor sparked by the US inflation numbers. The benchmark STOXX 600 index registered a new record high point, achieving a second straight week of gains for the first time since May.

However, a survey released at the start of the week showed a drop in eurozone investor morale, breaking an eight-month streak of improvements. Investors expressed concern over the French elections, upcoming German state elections and uncertainty over the US presidential election later this year.

The presidential race took a grim turn at the weekend with the attempted assassination of Donald Trump at an election rally in Pennsylvania. Investors were quick to suggest the shooting raises his odds of winning the race for the White House.

Although market reaction to the French election results was muted, the risk of policy gridlock could make it even harder to improve the stretched finances of Europe’s third-largest economy and has stirred memories of previous eurozone crises. News that German exports fell more than expected in May did nothing to improve the mood.

With uncertainty rising in the US and elsewhere in Europe, investors are looking at the long-shunned UK market as a potential haven, given the prospect of relatively predictable policy and signs that the economy is picking up. UK stocks have seen 44 straight months of net outflows and the FTSE 100 trades at a near 50% discount to the S&P 500 index. But investors warned the honeymoon period could be short-lived unless Prime Minister Keir Starmer can pull of a plan to boost living standards without further stressing the UK’s finances.

BlueBay is a fund manager for St. James's Place.

Wealth Check

We all recall those life-changing moments. Meeting your life partner for the first time. Taking your newborn baby home or collecting the keys to your first flat.

And that moment when you pay off your mortgage? That’s a moment you never forget.

Becoming mortgage-free feels fantastic. After all, a mortgage is often the biggest debt we ever take on – and it can take over 25 years to pay it off. That’s decades of putting money aside, comparing interest rates, or shopping for the right mortgage.

Any change to your financial circumstances – especially a positive change – is an important moment to talk to your financial adviser for a review.

Paying off the mortgage often coincides with other important life stages. You may be approaching the peak of your earning power, enjoying bigger salaries or bonuses. Your day-to-day living expenses can start to go down, as children leave the nest. You might also come into a lump sum through an inheritance, or a savings account maturing.

Those few extra hundred pounds every month can seem quite a modest amount; certainly not like a life-changing lottery win. Which is why it can easily be ‘absorbed’ into the household budget or an extra lunch out.

But that extra money can be surprisingly powerful if saved or invested over a longer period. You won’t notice it if you’ve been paying the same amount into the mortgage anyway.

Even if you’re not thinking of stopping work just yet, it’s never too early to start thinking about your retirement. We’re all living longer – and that extra money could make a big difference to your quality of later life.

If, for example, you pay off your mortgage at 57 and work until you’re 67, you could invest the money you save on your mortgage repayments over that ten years. You'll reap the benefit of compounding - essentially 'growth on top of growth', which means your investment could enjoy a bumper couple of years by the time you’re ready to retire.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The Last Word

“We probably didn't play our best game, but there were definitely some good moments and we felt like we got back into the game, and then to kind of be sucker-punched with the late goal… it's heartbreaking.”

England Player Jude Bellingham reacts to England losing 2-1 to Spain in the Euro 2024 final.