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Client Update - 16th September 2022

Before I return to politics and inflation, I wanted to take a further moment to pay our tribute to Britain’s longest reigning monarch, Queen Elizabeth II. The Queen celebrated her 70th anniversary as our reigning monarch this year and represented stability and continuity from the post war era into the 21st century, acting as a unifying character in times of crisis. During the COVID pandemic when we were locking ourselves behind closed doors for four months, she captured the mood of defiance with a simple reference to the second world war – “we’ll meet again”. During her tenure she met 13 of the last 14 US Presidents, oversaw the decolonisation of much of the British empire in Africa and Asia, was seen to jump out of a plane with James Bond for the Olympics in 2012 and took tea with Paddington to celebrate her Platinum Jubilee. She will be sorely missed.

I must now drag us back to the current market shenanigans. This week’s US inflation print was much anticipated by markets but did not bring the relief many hoped. The CPI increased by 0.1% for August when a 0.1% drop was expected and more interestingly the core measure, which strips out energy and food, rose by 0.6%. The market had hoped for weaker inflation data that would have enabled the US Federal Reserve to temper its interest rate increases, leaving a better chance for a softer landing for the economy. This stronger than expected data means the Federal Reserve has no reason to back off at the rate decision next week and the market now expects a 0.75% or a full 1% interest rate increase. The average cost of a Big Mac in the US stands at $5.15 according to the Economists Big Mac Index, up 30%, yet the federal minimum wage has remained unchanged at $7.25 an hour since 2009. This means it once took a minimum waged worker 33 minutes to earn a burger, it now takes 43 minutes such is the impact of current inflation.

In the UK, inflation fell slightly from 10.1% to 9.9% - the first decline in almost a year. This figure was still the highest in the G7 and continues to apply pressure to the Bank of England to keep raising rates aggressively in their meeting next week. The brighter news will be the effect of Liz Truss’s £150bn spend on limiting energy bills that is expected to cap inflation at a lower level than previously expected, however food inflation remains high at 13.4%, heading in the opposite direction to fuel inflation that has fallen from a year on year 43.7% to 32.1%. Our new Chancellor, Kwasi Kwarteng, is preparing a new mini-budget next week focussed on tax cuts. He has told Treasury officials to focus on a 2.5% annual growth rate (the long run average before the 2008/09 financial crisis) to allow Britain to control its budget deficit over time, a deficit that has already grown with the newly announced energy support package and will surely grow further with next weeks expected tax cuts.

As markets continue to wrestle with the current data, we continue to believe the turning point for the US Federal Reserve remains close, but this data confirms we are not there yet. Markets have been weak year to date but as we saw in mid-summer have the potential to bounce quickly if the interest rate pressure is relieved. Our client portfolios remain relatively defensive, but we are looking for opportunities to add exposure to US equities to ensure we capture the upside performance that will inevitably come.

For now, I shall wish you a good weekend and a final opportunity to pay our respects to Queen Elizabeth II on Monday. We certainly shall and with this in mind, our offices will be closed on the bank holiday. Thank you for your grace, humanity and fortitude your majesty, and God save the King.

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