November 7, 2017

Pegler’s market report – 07.11.17: UK interest rates – first rise for a decade

by David Pegler

in Insights Press Releases

As published in the Brighton Argus (07.11.17) Business section under the title Pegler’s Market Report:

UK interest rates – first rise for a decade

UK interest rates rose last Thursday for the first time in a decade, from 0.25% to 0.5%. The Bank of England’s Monetary Policy Committee (MPC) who voted 7-2 in favour of increasing base rates indicated that two further quarter-point rises were on the way over the next 2-3 years. Although the hike will bring some relief to savers and marginally push up borrowing costs, analysts expect the impact to be relatively limited.

The Bank of England believes that wage growth will pick up in 2018 alongside productivity, however inflation so far has been driven upwards largely by the fall in the pound, and not by underlying factors in the UK economy domestically.

While higher rates might ordinarily cause the pound to strengthen, the relatively dovish tone of the MPC’s accompanying statement – expecting rates to rise only to 1% by the end of 2020 – triggered a fall in the pound against the US dollar.

The interest rate rise also came despite forecasts of relatively weak economic performance, with the MPC now expecting the UK economy to grow at about 1.7% a year over the next three years.

There was no rest for the markets following the action at the Bank of England with services sector data, US job figures and Donald Trump’s pick for the Federal Reserve’s next chair to digest.

There is still talk of corporate taxes being slashed in the US. One of Trump’s key bills – if passed into law – would cut the US corporate tax rate to 20pc, a massive fall from the present 35pc rate and one that is likely to be extremely well received by the business community. This could be the first major reform of tax since the mid-1980s and would bring the US below the 22.5pc average of the industrialised world.

US labour market statistics came in far weaker than expected. Although unemployment fell to 4.1pc, a 16-year low, only 261,000 jobs were added to the US economy in October, far below the 313,000 expected by economists. Wage growth also disappointed, coming in flat compared to forecasts of a 0.2pc monthly rise.

Next shares fell sharply despite the retailer reporting positive sales growth in the three months to October. Overall, full price sales were up 1.3% in the quarter, but investors took fright after the retailer said that online growth had been offset by sharply lower sales in its high-street stores.

Debenhams, Marks & Spencer and Dixons Carphone, three of the most shorted stocks in the market, also fell on fears that Next’s slipping in-store sales were indicative of a further slowdown in the retail sector.

Tech giant Apple’s march towards becoming the first $1 trillion company took another step forward after its market cap smashed through the $900m barrier on the day of the iPhone X’s launch.

By David Pegler, Brighton Capital Management