Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP
Will Hurricane Irma create a storm in the financial markets or be a damp squib?
The damage from Hurricane Irma is substantial with widely varying estimates of the cost at this time. Fortunately, the cost is less than was feared when it looked as if the centre of the storm would hit Miami. The combined impact of two major hurricanes in the space of a couple of weeks will slow economic growth in the second half of the year. However, the rebuilding may have a longer term positive impact. For now it probably gives the Federal Reserve cause to delay any tightening of financial conditions. The debt ceiling was due to expire at the end of this month. Trump’s threat to close government if he did not get funding for the wall has been deferred until December as the debt ceiling was extended in a bill tied to $15 billion of emergency storm aid. Many people are not insured against these losses and for them the impact is particularly difficult but there will be a significant bill for insurance companies. While the total claim will not be known for some months, that sector of the equity market will take a short term hit but the loss is usually recovered by higher premiums in the long run.
So whilst our thoughts continue to be with those in the Caribbean and the US who have had their homes and livelihoods destroyed, there has been little overall impact on investment markets.
Following the announcement of August’s inflation data, what impact does this have on both the consumer and the currency?
The rise in inflation is largely as a result of the fall in the currency post Brexit. In June and July inflation came in slightly below expectations but August was higher again with the Consumer Price Index (“CPI”) rising by 2.9% year over year. While the CPI is the government’s preferred inflation indicator and is the target for the Bank of England (“BoE”), many contracts and inflation linked gilts still use the Retail Price Index (“RPI”) which rose 3.9%. RPI has a higher weighting to housing costs and has usually been higher than CPI. The latest wages numbers indicate that they only rose 2.1% in the last year. With living costs rising faster than wages, the consumer’s ability to spend is being constrained. While the impact of the currency move is likely temporary, there are increasing demands for pay rises to compensate for this. The government has come increasingly under attack over its public service pay policy whereby the current 1% cap looks like it will be abandoned.
The BoE expects inflation to fall back next year as the currency effect is reduced. As a result they may not respond to the rise in inflation above their 2% target. The latest vote was a 7-2 split in favour of keeping rates on hold yet the MPC noted that there is scope for a reduction in stimulus over the coming months. Above consensus inflation data combined with hawkish rhetoric by BoE has pushed the cable to its one year high but sterling remains fairly weak versus the euro.
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