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21 June 2021

US Interest Rates on The Rise?

Global equity markets reacted to the Federal Open Market Committee (FOMC) forecast last week, with concerns that rising inflation data and an optimistic labour market could change the Federal Reserve’s (Fed) viewpoint on interest rate hikes and monetary policy. The result of the FOMC partially highlighted these concerns, and committee members upped their expectations on the pace of policy tightening amid the US economy’s developing situation.

Each quarter, members of the FOMC complete a dot plot projecting their outlook for interest rates over the coming years. This quarter’s projection showed 13 of 18 officials signalling at least one interest rate hike by the end of 2023, up from seven in March. Seven of the officials also saw rate hikes within 2022, versus four in the previous meeting.  The dot plot has, therefore, changed to signify rate hikes in 2023 but, though this gives the market an indication, Fed Chair Jerome Powell stated that “The dots should be taken with a big grain of salt”.

In the meeting, Powell focused mainly on employment rather than price pressures, and with the latter largely out of the Fed’s control (supply-chain issues, bottlenecks, etc.), it could be argued that the more tangible element of the economy – how many people are earning, consuming, and contributing to GDP – is more important in the Fed’s eyes than looking at data that has been affected by many different variables in a global crisis. The most recent unemployment data published by the Labour Department reports have disappointed relative to forecasters’ expectations, with the US unemployment rate still elevated at 5.8% in May, and total employment still millions of jobs below pre-pandemic levels. If the Fed raises rates too early, this could lead to a fall in demand for goods and services, potentially causing lower economic growth and consequently higher unemployment. The question therefore remains as to whether the Fed will be pressured into interest rate hikes due to severe inflation, despite employment lagging, or if it is waiting until employment data meets the need to adjust rates?

US equity markets were subdued prior to the FOMC meeting, but since it took place the US S&P 500 and Nasdaq have taken different paths. The former dropped 0.57% overall last week, while the latter rose 1.37%. The UK’s leading 100 stock index fell after the FOMC meeting, yet the index was only down 0.14% from the opening price at the beginning of the week.

Closer to home, the City of London is welcoming another tech company which plans to go public in the UK. Wise, the fintech company previously known as TransferWise, announced last Wednesday that a direct listing on the UK stock market would allow a cheaper and more transparent way to broaden Wise’s ownership than the traditional stock market launch – otherwise known as an Initial Public Offering (IPO). A direct listing differs from an IPO in that no new capital is raised; instead, shares held by existing shareholders become tradeable in the market - in this case, the London Stock exchange. Wise will be the first technology company to complete a direct listing in the UK, and it appears the company has taken notes from the recent Deliveroo IPO – which was dubbed the worst IPO in London’s history – taking a path that avoids valuations from large investment banks.

A new data release from the British Business Bank has shown the number of equity investments in Yorkshire and the Humber companies increased by 10% in 2020. The British Business Bank also found that the total value of equity investments in Yorkshire and Humber reached £146m across 68 deals, a 145% increase from £60m in 2019. Roughly 10% of equity deals supported by British Business Bank last year were made in Yorkshire and the Humber, a tenfold increase from 2015. The increased investment shows an appetite for equity in smaller businesses in Yorkshire and Humber, and with the volume of equity deals from British Business Bank to companies in London reducing even further from 63% in 2015 to 42% in 2020, the regional imbalance of financial investment appears to be on the right path.

Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
US Interest Rates on The Rise?
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