No rate of inflation

The Bank of England released its latest quarterly inflation report on Wednesday, the highlight of which was the Bank’s continued belief inflation would remain subdued for some time to come. The Bank of England considers the markets are right not to expect any rate rises till maybe this time next year, inflation could fall below 1% before it starts to pick up. The latest wage inflation data was also released on Wednesday, reporting that wages grew at 1.3% year on year. Much was made, quite rightly that wages are now growing faster than inflation but it’s worth pointing out this is more to do with the fall in the headline inflation rate than a pick up in wage growth.

 

The pound jockeyed around a little during the speech but remained close to yesterday’s level of $1.59. Two year gilt yields slipped 4 basis points to 0.62%. Two-year gilts are considered the most sensitive to rate expectations. Ten year gilt yields also fell to now yield 2.18%.

 

The FTSE 100 drifted slightly lower during the day, one cannot help but continue to feel that if inflation is to remain close to 1% for a while to come, and the real return on equities remains superior to that of gilts, assuming equities can just maintain current dividends,, equities should remain an attractive asset class.

 

Mark Carney did maintain his growth forecast of 3.5% for this year but lowered it slightly for next to 2.9%.

 

There are many similarities between our economy and the US economy; our economic growth rates are similar, as are our inflation and bond yields, a notable dissimilarity are the performance of our blue chip stock indices.

 

The Ftse 100 languishes about 6% below its high in 2007, whereas the S&P 500 is some 20% above the level it reached in 2007.  In the past five years the FTSE 100 has risen just over 20%, the S&P 500 has nearly doubled. Part of the reason for this is the FTSE 100’s higher exposure to the resource sector, both oil and mining. Unlike the FTSE 100 technology makes up nearly 20% of the S&P 500 index, companies like Apple for example. The technology sector has been one of the strongest performing sectors in the past few years. Another reason may be that UK companies relay much more on the strength of the global economy overall. Our experts as a percentage of GDP are nearly twice that of the US.

 

Studying the spread betting index traders last year, playing the mean reversion between the FTSE 100 and the S&P 500 was a popular trade. Those who tried it probably did not look at the fundamentals behind what was driving the outperformance.

 

Posted on November 12, 2014 .