Wealth Watch - 27/08/24

Stock Take

Speaking at the Jackson Hole economic symposium last week, Federal Reserve Chaiman Jay Powell indicated the time had finally come for the Fed to begin cutting interest rates.

The annual event had taken on additional interest this year, with the question of when, not if, rates would be cut high on a lot of economists’ minds.

This question had taken on extra importance since the start of August, when weakening job data sent markets in a tailspin around a potential recession, although global markets have since largely recovered around most of the world.

Powell’s answer last week was fairly definitive: “The time has come for policy to adjust.”

The question now is around the trajectory of any such adjustment. On this, Powell said: “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”

The next time the Fed will meet to make a decision on interest rates will be in September, where markets will be expecting either a 0.25% or a 0.50% cut. Before then, the US will release updated jobs data, which will likely have an impact on the Fed’s decision – a healthier job market might deter the Fed from cutting too fast, while weaker data might lead them to cut faster, in order to boost economic growth.

George Brown, Senior US Economist at Schroders, believes a 0.50% cut would be a mistake. He says: “It would muddy the messaging on the subsequent pace of easing at best, and at worst it would fuel fears of a recession. From our perspective, the US economy is slowing but remains solid.”

The market reaction to Powell’s speech was fairly muted, indicating that an interest rate cut was already anticipated and priced in.

Powell wasn’t the only central banker to give his views last week. Bank of England (BoE) Governor Andrew Bailey issued a note of caution last week, suggesting it was too early to declare victory on inflation.

He did, however, add: “Second round inflation effects appear to be smaller than we expected,” and: “We are now seeing a revision down in our assessment of that intrinsic persistence, but this is not something we can take for granted.”

Taken together, these statements appear to suggest the BoE will feel comfortable making further cuts to the UK Bank Rate, albeit at a measured pace.

The question around interest rates was likely made a little easier for Bailey this morning, after data from the British Retail Consortium (BRC) revealed that shop prices fell at an annual rate of 0.3% in August. BRC chief executive Helen Dickinson suggested discounting to shift summer stock, particularly in fashion and household goods, were key drivers of the fall.

This marked the first time prices had fallen since 2021, and likely provides some indication of where inflation might be heading ahead of the next official Office for National Statistics release, due in mid-September.

That said, last week it was also revealed that the UK’s fuel price cap will rise by 10% from October. This will inevitably add to pressure on headline inflation rates as well as consumer wallets.

Ongoing oil price pressures, exacerbated by geopolitical tensions in the Middle East, continues to affect global markets. Last week saw increased missile exchanges between Israel and Hezbollah in Lebanon, adding to the sense of nerves.

Turning to Asia, the Japanese Nikkei Index continued to recover from its drop at the start of August. Suggesting lessons had been learned, Bank of Japan Governor Kazuo Ueda ended last week telling Parliament: “Markets at home and abroad remain unstable, so we will be highly vigilant to market developments for the time being.”

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

Wealth Check

When we talk about saving and investing, we generally think of them as the two main ways to set money aside for the future. It can be easy to confuse them as one and the same thing – or think that you should opt for one or the other.

In fact, they’re two quite distinct options that you have for aiming to grow your money for your future.

Broadly speaking, saving is about putting money aside in the short-term, for the short-term – whether it’s a ‘just-in-case’ fund, to cope with those unexpected car repairs, and boiler breakdowns or something specific, such as a family holiday, or a new kitchen. Whatever you’re saving the money for, it is usually best to ensure at least a portion of your money is in a cash account with no restrictions on withdrawals so you know you can get your hands on funds at short notice if you need to.

Instant or easy-access cash savings are a vital part of your financial resilience. Financial advisers recommend keeping three to six months’ salary of ‘emergency’ money in cash. If you’re paying in regularly, and you haven’t looked to see how much money you’ve got in your savings or even current accounts, you may want to check. Too much money sitting in cash accounts isn’t always working as hard for you as it could be.

Saving for long-term goals is where investments come into play. Investing in things like stocks and shares, or bonds and leaving the money untouched for ten to fifteen years or more, means it has the potential to grow into a bigger sum than it would in a cash account.

Investing money for a comfortable retirement is a good example. We don’t know the final figure we’ll need for the future, since we don’t know how long we’ll live. But we definitely plan to retire one day – and investing for that day is a long-term financial strategy.

However, investing means you’re accepting more risk with the money you put in, since the markets may rise and fall – and so may the value of your investments. But the ups and downs of markets typically even out over the medium to long term (five years or more). And the greater growth potential means your money can benefit from the ‘snowballing’ effect of compounding too.

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

An investment in equities will not provide the security of capital associated with a deposit account with a bank or building society.

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