The week just ended

“Determined by chance, whim, or impulse, and not by necessity, reason or principal.” The word arbitrary made the news this week after it was repeatedly used by the US Treasury on Tuesday, referring to the decision taken by ratings agency, Fitch, to downgrade their credit rating.

US Treasury Secretary, Janet Yellen, branded the downgrade of the world’s largest economy’s credit rating - falling to AA+ from a previously optimal AAA - as “arbitrary and based on outdated data”. Fitch cited US fiscal deterioration over the next three years and repeated 11th hour debt ceiling negotiations that threaten the government’s ability to pay its bills as the main reasons for the move. Ironically, the move united the aforementioned fractured political system in its disgust for what is seen as an embarrassing downgrade for those in the White House.

Investors took a muted view. Although stock markets lost ground, the moves were in sharp contrast to those investing in bonds, with US Treasuries barely moving after the news. The market volatility index (VIX) did jump around 15% by the middle of the week, but the level was still near the lows of the last 12 months.

For those who are keen on their judicial etymology, the word arbitrary comes from the Latin arbitrarius, also the source of arbiter; someone who is tasked to judge a matter of debate. An arbitrary legal judgment for example, is a decision made at the discretion of a judge, not one that is fixed by law. With this in mind, it was interesting to take a trip to Threadneedle Street on Thursday as the Bank of England raised borrowing costs by a further 0.25%. Judging that underlying inflation is still a major worry for the economy, the central bank also gave a new warning that borrowing costs were likely to stay high for some time to come yet.

Interestingly, the nine-person Monetary Policy Committee (MPC) who comprise the judging panel on rates, voted 6-3 for the increase but were split three ways on the decision for the first time this year, with two MPC members voting for a 0.5% rise this month and one member voting for no change to rates at all.

The committee also now forecasts that inflation will be slightly slower to fall during next year - a key metric when judging where interest rates should be. The bank now believes that inflation will not return to its 2% target until the second quarter of 2025 - three months later than it forecast back in May this year.

With the appalling summer the UK has endured so far this year, data released on Thursday showed that consumers have also been having to make judgment calls recently about how they spend their free time. The number of people heading out to the shops fell for the first July in 14 years as the UK grappled with one of the wettest summers on record so far. Data from market researcher Springboard showed that overall footfall was down by 0.3% annually - the first drop for a July since 2009. High streets were hit hardest whereas shopping centres and retail parks, which are mostly sheltered, received a boost in visitor numbers. Interestingly, those areas which often benefit from a warmer summer suffered the most, with coastal areas seeing their own footfall slow by 4.6%.

The first Friday of the month usually brings with it US non-farm payroll data, a preferred piece of data for the Federal Reserve to analyse when assessing future rate policy. On the surface the data looked to be very strong, with average hourly wages ticking up ahead of predictions by 0.4% from last month, whilst unemployment also fell. However, although 187,000 Americans joined the workforce this month, it was below predictions of 209,000 and the lowest tally since the pandemic. It just goes to show, you can never judge a book by its cover.

This coming week

With the Bank of England having raised rates by another 0.25% the previous week, much of the early part of the week ahead will focus on domestic data. It still remains unclear if the bank has a few more rate rises up its sleeve, with many not buying the narrative that they will halt just yet.

With this in mind, the coming week will allow us to at least gauge what people are buying, as Tuesday sees the British Retail Consortium releases its high street sales monitor data, measuring the change in the value of retail store sales. Admittedly the numbers do have a narrower focus as they just cover members of the consortium, however they are still important for giving us a notion as to how consumers are spending. 

Economists will certainly be spending a great deal of time analysing Chinese inflation statistics during the middle of the week - a piece of data that could help set the tone for days to come. With China’s reopening of their economy having been patchy at best this year, inflation has not proven to be as much of an issue as it has for western economies. With demand for Chinese products, both domestically and internationally, having fallen as the world braces for a possible recession, it will be interesting to see how the world’s second largest economy is faring, and Wednesday’s data will certainly provide a strong gauge.

The following day gives us another chance to analyse global inflation as this time the US releases its own Consumer Price Index (CPI) numbers. With inflation having declined rapidly on an annual basis from over 9% to just 3%, many will be hoping the trend continues, not least those at the Federal Reserve who value the data highly when considering future rate policy.

The week will be rounded off on domestic shores, with UK gross domestic product (GDP) providing us with the broadest gauge of how our own economy is performing. The numbers will be closely monitored, not only by those in the City of London but also those in the City of Westminster, hoping to gain some political collateral with what will be a widely reported piece of news.

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 4 August 2023.