US stocks and government bonds rallied sharply on Wednesday after July inflation data came in at 8.5%, lower than the forecasted 8.7% following a sharp decrease in fuel prices. This eased investor concern that the Fed will again raise rates by 0.75% at the next meeting in September. The world’s largest economy posted inflation of 9.1% in June, the highest level in 40 years prompting the Fed to raise rates by 0.75% at the last two meetings. However, consensus expectations are currently for another 0.75% rise.
Amidst the worsening cost-of-living crisis in the UK, with energy prices now predicted to reach a staggering £5,000 per year next year, business secretary Kwasi Kwarteng has drawn up contingency plans which include possible emergency measures in the winter to conserve gas. These measures would need to be enforced should severe weather impact imports from Norway and France, and would include organised blackouts for homes and businesses. Since April, the UK has been in the unusual position of being a net exporter to France due to their decrease in nuclear outputs, which could put additional pressure on winter energy supplies.
Also in the UK, the Communication Workers Union announced plans to organise Royal Mail strikes in August and September, the latest in a surge of industrial action sweeping across the UK. The postal and delivery service group said this would lead to material losses at the already lossmaking firm – “the negative commercial impact of any strike action will only make pay rises less affordable and could put jobs at risk,” Royal Mail said. Unsurprisingly, the share price continued to suffer.
Earlier today it was announced that the UK economy contracted by 0.1% during the second quarter of the year, after rising 0.7% in the previous three months. This figure was close to those expected by economists and the Bank of England, the latter of which predicted a rise in third quarter GDP before the dramatic increase in energy bills potentially send the domestic economy into a year-long recession starting in the winter. Despite such concern, financial markets have been steady across the week.
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Andrea Wood, BSc (Hons) / ACSI- Investment Management Support