Stock Take
“Having a little inflation is like being a little pregnant”, observed Leon Henderson, economic adviser to US President Franklin Roosevelt.
Markets drifted at the start of the week following holidays in the UK and US, as investors awaited Friday’s news on whether consumer prices in the US and eurozone were now going up slowly enough to keep interest rate cut hopes alive.
A little inflation would be welcome in Japan, which has battled with persistent deflation and held interest rates near zero for three decades. On Monday, at a conference hosted by the Bank of Japan (BoJ), its governor reiterated that the central bank would proceed cautiously with its inflation-targeting plans but acknowledged that anchoring inflation expectations to the 2% target is “a big challenge.”
The unique difficulty for the BoJ is in estimating what level of interest rates is considered neutral for the economy when they’ve been abnormally low for so long. Markets are currently pricing in an interest rate hike to at least 0.20% by the end of the year.
After deteriorating for three straight months, news on Tuesday that US consumer confidence increased in May caught investors off-guard. The survey revealed continued optimism about the labour market, which continues to drive the country’s economic expansion, although worries about inflation persisted. That said, there was an increase in the number of consumers who believed the economy could slip into recession in the next 12 months.
Ahead of the wider eurozone inflation data came news that German inflation rose slightly more than forecasted in May. However, economists were keen to stress that the figure was no reason for the European Central Bank to panic. The outlook for Europe’s biggest economy has brightened following the painful severing of Russian energy imports, but the rate of recovery remains slow.
As it turned out, Eurozone inflation followed Germany’s lead, registering a bigger-than-expected increase in May. The annual 2.6% figure compared to 2.4% in each of the previous two months, underlining the challenge faced by the European Central Bank. The news is unlikely to stop the ECB lowering borrowing costs this week, but appeared to cement the case for a pause in July.
Worries about lingering inflation and higher-for-longer interest rates across major economies put Asian and US stocks under pressure on Thursday.
However, ahead of Friday’s inflation update came news that the US economy grew slower in the first quarters than previously estimated, expanding 1.3% against the advance estimate of 1.6%, notably slower than the 3.4% pace in the final three months of 2023. There were signs that consumer spending was moderating, while weekly jobless claims rose more than expected. This added to hopes that the Fed was succeeding in cooling the economy and on track to cut interest rates at least once before the end of the year.
In the US, the personal consumption expenditures index – the Fed’s preferred measure of inflation – tracked sideways in April as prices rose 2.7% in the 12 months to April, matching the gains in March. Whilst there was some relief that the inflation reading wasn’t hotter than expected, the status quo report gave no indication whether the Fed is going to stay on hold longer, or cut rates sooner.
Leading US stock indices broke their five-week winning streak as investors digested the inflation news. The S&P 500 ended May having risen 10.6% year-to-date.
Approaching the mid-year point, markets are in rare territory in terms of the volatility that is part and parcel of investing. April’s small pullback is the only dip so far this year. In the last 40 years, there have only been four years with a smaller intra-year decline. This is in spite of a growing list of challenges, from stickier-than-expected inflation and dramatically delayed rate cut expectations, to rising geopolitical tensions, most notably in the Middle East.
But it’s important investors remember that even the best markets experience temporary setbacks. Uncertainties around elections and central bank actions are just some of the issues that could trigger bouts of weakness over the rest of the year. As always, it’s best to sit tight.
Wealth Check
Thinking of selling your second property? Cashing in a share portfolio? When you sell an asset that’s gone up in value since you bought it, you may have to pay Capital Gains Tax (CGT) on your profits.
One possible way of reducing this tax bill, is by giving an asset away to your spouse or civil partner or splitting it with them. By doing this, both of you are able to use your individual CGT allowance and reduce the amount of tax payable overall. Such a transfer must be on an outright and unconditional basis.
Who pays Capital Gains Tax?
CGT is a tax payable on the profit or gain you make when you sell something that’s increased in value since you acquired it. It’s not a tax on the whole amount, just on the profit you make. You may need to pay CGT if you sell or gift certain assets and the overall profit you make is over the annual CGT allowance.
Assets that you might pay CGT on include shares that aren’t part of an ISA or pension (both CGT exempt); business assets; personal possessions worth more than £3,000; and property that isn’t your main home. That could include a second home, a buy-to-let property, or even a house or room that’s only occasionally occupied.
How much Capital Gains Tax will I have to pay
If you are a basic-rate taxpayer and remain so after adding the gain to your income, you’ll pay 18% CGT for residential property and 10% if you’re disposing of other assets.
What is the Capital Gains Tax allowance?
The CGT allowance for 2024/25 is £3,000 per individual. As far as CGT is concerned, if you are living with a spouse or a civil partner, you each currently have a £3,000 tax-free annual allowance. £3,000 is the maximum profit you can make on the sale of chargeable assets this tax year before you have to pay CGT.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.
In The Picture
Aristotle’s Jim Henderson on what is currently driving the market.
The Last Word
“As the leaders of political parties, as all those who occupy positions of responsibility in society, we have heard the voices of our people and we must respect their wishes.”
South Africa’s President Cyril Ramaphosa reacts to his party losing its parliamentary majority for the first time since apartheid ended 30 years ago.
SJP Approved 03/06/2024