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Monthly Review and Outlook

Updated: May 17, 2022

December saw a number of key economic data releases indicating continued strength across both the developed and emerging worlds. Latest inflation data in the US, the UK, Europe and Japan all showed increases, providing further evidence if any were needed that more interest rate increases are on the way.

"This is in fact exactly what we saw"

The US and the UK, which have both already seen interest rate hikes, saw inflation rising away from what should be considered target (US and UK CPI increased, respectively, from 2.0% to 2.2% and from 3.0% to 3.1%). The Eurozone and Japan have yet to hike rates for the first time this cycle, but both saw increases in inflation (respectively from 1.4% to 1.5% and from 0.2% to 0.6%). As for the emerging world, Mexico, India, Indonesia and Brazil all saw inflation increase, while China’s and Russia’s were flat.

Such broad rises are indicative of a strong global economy and what one would expect at this stage of the cycle. In fact, if any­thing it is a surprise that inflation hadn’t risen earlier.

The major source of inflation pressures at any time and in any place is wages, which themselves tend to be a function of levels of employment. In key developed economies, December saw jobless rates either fall or stay steady. Indeed, employment trends have been very consistent with the inflation data. The US and the UK are later cycle than the Eurozone and Japan, and so should be seeing lower employment growth. This is exactly what we saw in December with unemployment rates in the later cycle coun­tries showing no change, while the Eurozone and Japan announced further declines (respectively from 8.9% to 8.8% and from 2.8% to 2.7%).

From a longer term perspective, unemployment rates in the US and the UK are now close to historical lows, while Europe and Japan appear to still have scope to fall further (Japan’s 2.7% may seem low but it is still well above previous cycle lows).

Employment data in the emerging world is less reliable (China’s has been close to 4% for years!), but even so, the trends are pos­itive and indicative of broad economic strength. Unemployment rates in Russia, Indonesia and Mexico have been falling steadily over the last few years and have now reached historically low levels. Encouragingly, Brazil, which has been going through an eco­nomic rough patch for the last 3 years, is now seeing its unemployment rate fall (having peaked at 13.3% in the second quarter last year, it fell to 12.1% in the fourth quarter).

Given the economic backdrop described above, and where various countries are on the interest rate cycle, one should have expected equities and commodities to be strong and bonds to be weak. This is in fact exactly what we saw, with energy, indus­trial metals and precious metals all posting strong gains. Having paused somewhat in November, equity markets were also firm across the board. Bonds were a little more mixed, with the US, Europe and Japan seeing their 10 year yields rise, while the UK’s fell slightly.

There was nothing in December’s economic data releases to cause us to question our outlook, namely that the world economy is now moving firmly into expansion phase and that we should continue to reduce our exposure to risky assets. We think that equities on the whole can continue to rise for another couple of years and that peak phase, the point at which interest rate hikes start to bite, will arrive around 2020.

Published in Investment Letter, January 2018

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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