Michael Addis

Market Commentary

For the week ending 18 May 2018
Report by Michael Addis
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Michael Addis


The Bank of England (BoE) Monetary Policy Committee’s (MPC) decided last week to leave interest rates unchanged due to the economic uncertainty created by a number of weak first quarter data points. However, this week’s labour market data releases provided some cause for optimism. This resulted in raised future UK interest rate expectations, with August now seen as the likely date for the next increase.

On Tuesday, labour market figures revealed that UK employment rose by a very strong 197,000 in the three months ending in March, materially higher than consensus expectations of a 125,000 increase and the largest quarterly rise since late 2015. In addition, average weekly earnings, excluding bonuses, rose from 2.8% to 2.9% over the same period, above the MPC’s forecast of 2.75% for 2018 as a whole. For the first time in over a year, wage growth exceeded inflation. “Growth in real wages means that people are starting to feel the benefit of more money in their pockets”, said Chancellor Philip Hammond. However, some caution is warranted. Inflation is likely to pick up over the coming months due to the rise in the price of oil and the weakness of Sterling, which will increase the prices of imported goods. In addition, the lack of productivity growth suggests wage increases will remain somewhat constrained, but nonetheless inflationary, with little spare capacity.

Elsewhere, the US Dollar continued to strengthen this week, as did the yield on the US 10 Year Treasury Bond. A solid move above 3%, the highest in seven years following robust US retail sales data, has implications for indebted emerging economies, such as Argentina and Turkey, making Dollar denominated debt commitments more expensive to service. Also worthy of note, the three-month US Treasury yield now equals the yield on the S&P 500 Equity Index for the first time since 2008, thereby reducing the wider attraction of equity dividends as a source of income.

North Korea also remained in the headlines this week. Rumours circulated that it is now backing away from next month’s proposed summit meeting with President Trump in Singapore, after the US conducted a joint military exercise with South Korea. A strongly-worded statement attributed to Kim Kye-gwan, a senior North Korean foreign ministry official, said it had no desire to deal away its nuclear weapons for economic compensation or benefits. He was quoted as saying, “If they only push us into a corner and force us towards unilateral denuclearization, we will not entertain such a conversation and will have no choice but to reconsider the decision to accept the upcoming North Korea – US summit”.

The global investment backdrop remains favourable, but rising global interest rates and geo-political risks suggest caution is warranted.