By Michael Stanes, Investment Director at Heartwood Investment Management
The Federal Reserve interest rate cycle is back in focus, following the release of hawkish minutes of April’s policy meeting and signs that US inflation is firming. The Fed minutes revealed that policymakers have not ruled out a rate hike this summer, noting that market pricing of Fed expectations was “unduly low.”
Data dependency will be put to the test
Policymakers are keeping alive the option of raising rates this summer and are likely hoping to realign market expectations. Since the Fed’s dovish policy statement in March and further cautious comments by Chair Janet Yellen, financial markets have taken a complacent view of the Fed rate path. Broad expectations that the Fed would stay on hold for a prolonged period has helped the S&P 500 to largely hold on to gains since mid-February, has driven two-year treasury yields lower and maintained a softer US dollar trend this year.
The Fed has consistently emphasised that its policy decisions are ‘data dependent’. This phrase has provided policymakers with defensive cover during times when the US economy has been tested by external forces. However, more recent economic releases are showing that US economic momentum is starting to gather pace in the second quarter, particularly domestic consumption. If this upward momentum can be sustained, the Fed will need to start following through on its words. Indeed, a failure to act in the event that the Fed stays on hold longer than the underlying data would suggest is likely to increase the risk of a policy error.
Inflation: Moderate upside risks
The inflation outlook is key to the Fed rate path. We believe that inflation risks are moderately skewed to the upside, a view that we have held for some time. While headline inflation has been depressed by disinflationary energy effects, core inflation has shown greater resilience since October 2015, due to the strength of service inflation. Shelter comprises one third of the US CPI basket and this, together with medical care costs, has placed upward momentum on services inflation. Further evidence of rising services inflation can be seen in April’s PMI services survey, where prices paid by suppliers rose for the first time in three months. Moreover, this year’s rebound in energy prices coupled with some moderation in the strong US dollar trend could boost headline inflation over the medium term.
Another factor supporting the Fed rate tightening path is the US labour market: the one area of the economy that has shown consistent strength. Nonetheless, April’s employment report showed signs that the current labour market recovery cycle is maturing, evidenced by slower jobs growth and a levelling in the unemployment rate, which has fallen meaningfully since 2010. Small business surveys also show that the rate of hiring is slowing. However, as the economy reaches ‘full employment’, wages pressures are likely to build. Average hourly earnings rose 2.5% in the last 12 months to April, signalling modest pressures. Interestingly, the Federal Reserve Bank of Atlanta’s wage growth tracker, a measure we find more representative of underlying wage trends, shows that median wage growth increased 3.4% year-on-year in April 2016 and has been on a steady upward trajectory since October 2015.
Mixed economic activity but some reassuring indicators
While we expect the inflation outlook to support a Fed tightening path, we have to acknowledge that policymakers’ task has been complicated this year by disappointing economic activity. This has largely been due to the manufacturing sector, which continues to struggle amid high inventories, slower global growth, weak commodity prices and a strong US dollar.
Reassuringly, services activity is picking up, reducing concerns that manufacturing weakness could impact broader confidence. US consumption has not been as strong as we would have expected, with domestic sales slowing in the first quarter. However, April’s stronger than expected retail sales report signals a potential shift in consumer behaviour, particularly with financial market volatility having subsided and evidence that wage growth is picking up. The housing sector also remains on a recovering trend, albeit growth has slowed in the last few months. Further positive data surprises are likely to increase the probability that the Fed acts in July, but no later than September. After that time, the Fed will most likely want to avoid implementing policy decisions during the US electoral cycle.
How should we expect markets to perform?
Prospects of higher US interest rates should keep a wider rate differential versus other developed economies, which we would expect to support the US dollar in the near term. US treasury bond valuations remain expensive and we maintain a short duration position. We expect that a shallow rate tightening cycle against the backdrop of modest growth and inflation should be relatively benign for corporate credit. However, we also recognise that the credit cycle has matured and investors will need to be selective in finding areas of the market offering compelling value. In this regard, we hold exposure to US high yield energy bonds, where the default outlook is starting to improve due to oil prices rebounding and a better energy supply/demand outlook towards the end of 2016/early 2017.
US equity valuations are looking stretched and corporate earnings growth remains under pressure. The US equity market has outperformed most other developed markets over the last 3-5 years. Given these factors, we have been lightening our exposure in favour of other equity markets, including Europe and Japan.
U.S. inauguration turns poet Amanda Gorman into best seller
WASHINGTON (Thomson Reuters Foundation) – The president’s poet woke up a superstar on Thursday, after a powerful reading at the U.S. inauguration catapulted 22-year-old Amanda Gorman to the top of Amazon’s best-seller list.
Hours after Gorman’s electric performance at the swearing-in of President Joe Biden and Vice President Kamala Harris, her two books – neither out yet – topped Amazon.com’s sales list.
“I AM ON THE FLOOR MY BOOKS ARE #1 & #2 ON AMAZON AFTER 1 DAY!” Gorman, a Los Angeles resident, wrote on Twitter.
Gorman’s debut poetry collection ‘The Hill We Climb’ won top spot in the online retail giant’s sale charts, closely followed by her upcoming ‘Change Sings: A Children’s Anthem’.
While poetry’s popularity is on the up, it remains a niche market and the overnight adulation clearly caught Gorman short.
“Thank you so much to everyone for supporting me and my words. As Yeats put it: ‘For words alone are certain good: Sing, then’.”
Gorman, the youngest poet in U.S. history to mark the transition of presidential power, offered a hopeful vision for a deeply divided country in Wednesday’s rendition.
“Being American is more than a pride we inherit. It’s the past we step into and how we repair it,” Gorman said on the steps of the U.S. Capitol two weeks after a mob laid siege and following a year of global protests for racial justice.
“We will not march back to what was. We move to what shall be, a country that is bruised, but whole. Benevolent, but bold. Fierce and free.”
The performance stirred instant acclaim, with praise from across the country and political spectrum, from the Republican-backing Lincoln Project to former President Barack Obama.
“Wasn’t @TheAmandaGorman’s poem just stunning? She’s promised to run for president in 2036 and I for one can’t wait,” tweeted former presidential candidate Hillary Clinton.
A graduate of Harvard University, Gorman says she overcame a speech impediment in her youth and became the first U.S. National Youth Poet Laureate in 2017.
She has now joined the ranks of august inaugural poets such as Robert Frost and Maya Angelou.
Her social media reach boomed, with her tens of thousands of followers ballooning into a Twitter fan base of a million-plus.
“I have never been prouder to see another young woman rise! Brava Brava, @TheAmandaGorman! Maya Angelou is cheering—and so am I,” tweeted TV host Oprah Winfrey.
Gorman’s books are both due out in September.
Third on Amazon’s best selling list was another picture book linked to politics and projecting hope: ‘Ambitious Girl’ by Vice-President Kamala Harris’ niece, Meena Harris.
(Reporting by Umberto Bacchi @UmbertoBacchi, Editing by Lyndsay Griffiths. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)
Why brands harnessing the power of digital are winning in this evolving business landscape
By Justin Pike, Founder and Chairman, MYPINPAD
Delivery of intuitive, secure, personalised, and frictionless user experiences has long been table stakes in digital commerce, well before the era of COVID-19. As businesses harness the revolutionary power of digital technologies, they have pursued large-scale change to adapt to evolving consumer preferences (some more successfully than others, but that’s a blog for another day). Digital transformation is a term we hear repeatedly, and it looks different for each organisation, but essentially, it’s about utilising technology and data to digitise, automate, innovate and improve processes and the customer experience across the entire business.
As I said, this was already well underway but then came 2020 and no industry escaped the disruption of the coronavirus outbreak, which has had an indelible impact on businesses performance, operations, and revenue. Regardless of whether the impact of COVID has been very positive or very challenging, it has forced organisations globally to re-evaluate and re-orient strategies to adapt.
As lockdowns and pandemic-related restrictions continue to change daily life, this raises the question of how we can balance a dramatic shift to digital and the benefits it brings, while ensuring business continuity and innovation both during and post-COVID, and protecting everyone against fraud?
Digital is an essential survival tool, and even more so in a COVID world
No one could have predicted the dramatic digital pivot that has taken place over this year. Indeed, within weeks of the COVID outbreak cash usage in the UK dropped by around 50%. Digital solutions including delivery applications, contactless payments, mobile commerce, online and mobile banking have become essential components of a touchless customer experience in the era of social distancing. It’s no longer just about an enhanced and superior customer experience, it’s also about health, safety and survival.
In store, businesses have benefited from contactless payments enabling faster throughput and reduced need for consumers to touch payment terminals (therefore requiring greater cleaning, which degrades the hardware much faster). Mastercard reported a 40% increase in contactless payments – including tap-to-pay and mobile pay – during the first quarter of the year as the global pandemic worsened. Digital has also become an essential sales channel for many B2C brands. Where brick and mortar stores have been required to close, digital commerce enables continuity of customer relationships and revenue. This channel also provides brands with rich customer data, which can be used to enhance and personalise the customer experience and typically results in greater levels of engagement and uplifts in revenue.
Industry forecasts estimate that worldwide spending on the technologies and services enabling digital transformation will reach GBP 1.8 trillion in 2023 – a clear indication that the process represents a long-term investment and a global commitment to digital-first strategy. The key point here is that digital brings significant benefits, and regardless of COVID, is here to stay.
The challenges that rapid digital transformation brings to businesses
Regardless of whether businesses are operating in developed or less-developed economies, these times of crisis have levelled the playing field in the sense that all businesses are facing similar issues. Access to products and supplies, maintaining customer relationships, accelerating sales for some and declining sales for others, health and hygiene are just a few of the unique challenges brought about by COVID.
Many businesses in physical environments have had to swiftly implement changes to significantly reduce safety risks for staff and customers, such as contactless payments, mobile ordering and delivery options. But with these changes come a host of other benefits of digitisation, such as faster transactions, and reduced human error at the point-of-sale.
The reliance on technology, however, can also expose organisations and consumers to certain vulnerabilities. In particular, the risks of fraud and cybercrime have dramatically increased since the onset of the pandemic as scammers have taken advantage of digital technologies to target both businesses and individuals.
As a McKinsey report illustrates, new levels of sophistication in the activities of fraudsters have placed more pressure on companies that have been previously slow to go digital, bringing “into sharp relief how vulnerable companies really are”, and damaging the financial health of small and large businesses. In fact, the Bottomline 2020 Business Payments Barometer reveals that only one in 10 small businesses across the UK report recovering more than 50% of losses due to fraud.
But take these stats with a grain of salt. While it is important to be aware of the risks and challenges this new business landscape brings, it’s equally as important to have a lens firmly across your own business, industry and audience, and to identify the changes you can make internally to mitigate risk as well as improve your customer experience. Where can you make some quick wins? Do you have the right skillsets internally to achieve what you need to achieve? What technology is out there that will enable your business goals? There are tech companies like MYPINPAD that are making huge strides in software development, which will transform businesses globally.
A digital world post-COVID
Almost a year in, the line between business success and failure remains fragile. However, an ongoing transition towards greater digitisation will be the difference between survival and the alternative.
There is a wide range of initiatives businesses can implement to weather this storm. If we look at the space MYPINPAD operates within, secure digital consumer authentication is crucial to the ongoing success and security of not only financial products but also identification and verification across a range of different industry verticals. Shifting the authentication of consumers securely onto mobile devices enables businesses to completely reshape their customer experiences. By bringing together a more seamless, frictionless customer experience, accessibility, privacy, security and access to consumer data, businesses are able to drive digital transformation across day-to-day activities.
Against this backdrop, software with stronger security standards continue to play an ever more vital role in supporting society, protecting consumers and businesses from the increase in risks that rapid digitisation brings. Already, merchants can deploy PIN on Mobile technology from companies like MYPINPAD, onto their smart devices to speed up the digitisation process many are now tackling.
Essentially, opening up universal payments and authentication methods that feel familiar, for both online and face-to-face transactions, will be key to opening up a world of possibilities when it comes to redefining how businesses engage with consumers.
Brexit responsible for food supply problems in Northern Ireland, Ireland says
LONDON (Reuters) – Food supply problems in Northern Ireland are due to Brexit because there are now a certain amount of checks on goods going between Britain and Northern Ireland, Irish Foreign Minister Simon Coveney said.
British ministers have sought to play down the disruption of Brexit in recent days.
“The supermarket shelves were full before Christmas and there are some issues now in terms of supply chains and so that’s clearly a Brexit issue,” Coveney told ITV.
The Northern Irish protocol means there are “a certain amount of checks on goods coming from GB into Northern Ireland and that involves some disruption,” he said.
(Reporting by Guy Faulconbridge; Editing by Tom Hogue)
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