Mid Monthly Update – July 2019

Overrated II

In June’s mid-monthly update ‘Overrated’ , we commented on the potential over-optimism of developed government bond markets regarding the future path of official interest rates led by the US Federal Funds rate. At the same time, we referenced the start of the 2019 Cricket World Cup in England and Wales and over rates.

Over the past month, the yield on ten-year US Treasury bonds edged closer to 2% before re-tracing back to 2.10%.

Meanwhile ten-year UK Gilts have crept lower in yield, higher in price to yield a meagre 0.80% at the time of writing. Not much of an investment with inflation targeted at 2% by the Bank of England, the same target as the US Federal Reserve for US inflation.

At least the US ten-year has a positive yield over the inflation target but with tight labour markets, Central Banks would normally be on the watch for rising wage inflation. That remains the case in the UK but in the US, the non-accelerating inflation rate of unemployment (NAIRU) keeps being revised down towards current levels of unemployment, which when announced last Friday for the month of June 2019, was 3.7% (see chart below).

Average earnings in both the US and UK are running at just over 3% by the way.

Federal Reserve Chairman, Jerome Powell has been won over by recent weaker economic data of a more indicative nature, after all, unemployment data is a lagging indicator.

Consequently a 0.25% rate cut is widely expected at the next Federal Reserve meeting with a one-in-four chance of a 0.50% cut. You could be forgiven for thinking that a US economic recession is imminent but slower growth seems the more likely outcome. UK monetary policy remains moribund due to Brexit.

Bonds remain poor value in our minds and consequently have little presence in the Dynamic Fund, our multi-asset solution.

Trump Card

Rarely out of the news (on purpose), the US President has set his sights on Europe and in particular, Germany’s huge current account surplus.

Trump has been vocal in his desire for a weaker dollar which can provide another stimulus to the US economy. Ten-year German government yields are well into negative territory and monetary policy has pretty much reached its limits.

If Trump could engineer a weaker dollar against the Euro, the screws would be tightened on Europe’s economy. It will be interesting to see incoming ECB President, Christine Lagarde’s response. We have taken the prospect of a weaker dollar on board in our currency allocation.


Apologies for those not keen on sport but Sunday was one of those days in a British summer when a lot was going on. In last month’s update we referenced the start of the Cricket World Cup, Sunday saw its conclusion and a triumph for England on home soil.

Like many, I was glued to the match against New Zealand only pausing between overs to switch over to catch snippets of the men’s final at Wimbledon – another epic encounter.

Both sports were winners but the respect and integrity shown by victors and vanquished alike was special too. Both events were decided by wafer-thin margins in addition to amazing skill levels and a little luck but no matter, all competitors were a credit to their sports.

Now looking forward to next week’s British Open golf tournament in Northern Ireland, the continuation of the Women’s Netball World Cup in Liverpool and the start of the Ashes at Edgbaston at the start of August.

Apparently, there was also a motor race just off the M1 too – only joking petrol heads – well done Lewis Hamilton.

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