Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Stock markets are trying their best this week to interpret a new wave of economic data. As well as the OECD upgrading its growth forecast for the year from 4.2% to 5.8%, there are also manufacturing PMI surveys gathered from the UK, US, Eurozone and Canada to enjoy. All but the latter were published yesterday.
Taken in isolation, the raw numbers so far are extremely positive. In the UK, manufacturing growth boomed to unprecedented levels. PMI hit 65.6, up from 60.9 in April, with anything above 50 signifying growth. US production also soared to unprecedented levels. The word ‘unprecedented’ applied across many Eurozone nations too.
But those numbers shouldn’t be read in isolation. This month, there was more than a hint of concern from producers as well.
Supply chains were very much in focus. Italian and Spanish factories, both of which saw their highest PMI readings in decades, warned of product shortages and inflationary pressures as they struggled to ramp up production to meet demand. Both nations lagged Germany in a race to secure orders.
Disruption to production and supply chains feeds into the other side of the inflationary story that investors are growing increasingly wary of. Increased consumer spending - i.e. demand - has been rising as many nations ease their restrictions and shoppers return to normal habits. As we’ve seen through recent retail sales reports, that’s been pushing prices higher on a wide range of items.
Supply bottlenecks, such as those hinted at in this week’s manufacturing surveys, would compound the problem. If supply continues to fall short of demand, you’re walking into a perfect inflationary storm.
Suppliers remain cautious. Disruptions to supply chains were a key market theme last year. Many were disrupted by the pandemic, adding to our initial sense of panic. Some suppliers, like the OPEC+ group of nations who control the oil supply, curbed their production as demand seized up.
Demand for oil now has encouraged OPEC+ to gradually remove their curbs and release more barrels into the market. Brent crude, the global oil price benchmark, rose above $70 a barrel yesterday for the first time since March, extending a rally which has seen its value rise 30% so far this year.
The demand for commodities like oil is generally thought to be tied to inflation. As the price of raw materials used by manufactures increases, so does the price charged to consumers. Again, that could lead to an uptick in inflation.
Not that this is necessarily a bad thing. Shortly before the Eurozone manufacturing reports were released, the European Central Bank (ECB) reported that inflation in the region had hit 2% in May. That’s bang on the ECB’s target. Inflation at this level is, in theory, the mark of a healthy economy which encourages consumers to spend money rather than sit on piles of cash.
But again, the figure in isolation tells a different story when read in context. This is the first time Eurozone levels have hit 2% in more than two years. It’s a significant growth from April’s 1.6%, March’s 1.3% and February’s 0.9%. The UK - 1.5% in April - and the US - a more startling 4.2% - have also seen steep rises from their lowly levels of only a few months ago.
As it stands, ECB policymakers are convinced that any bout of inflation is strictly temporary. They’re probably right. But doubts are beginning to rise.
Markets have responded well to manufacturing news and rising oil prices this week. Our FTSE 100 closed yesterday up 0.82%, while the German DAX finished even higher. Investors should be happy - manufacturing surveys which point to growth are certainly better than ones that point to contraction. But it’s important to remember their wider context.
Even if inflation remains at these levels, it’s useful for investors to know which assets would perform best in a new economic environment. Graham Smith, recently wrote about how to invest in a higher inflation world. You can read his piece here.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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