September will see interest rate decisions from the U.S. Federal Reserve, Bank of England and the European Central Bank. It is probably fair to say the majority of commentators are expecting rate cuts and, theoretically, the latter always enhances the value of equities. However, rate cuts at this juncture would imply a question mark over aggregate demand and that’s a background that inevitably asks questions of corporate profitability.
Inflation, while certainly lower, still shows signs of not being entirely compliant. This is particularly relevant regarding service sector inflation which remains, in most territories, comfortably ahead of notional inflation targets. Of course, price indices comprise a myriad of components and in general, the recent path of essentials such as food and energy has been benign but equally, these items can be volatile. Consequently, this trend cannot be relied upon to continue indefinitely.
Not for the first time, we find ourselves somewhat at odds with accepted wisdom. Most governments are not only debt ridden but furthermore, show absolutely no intention of dealing with yawning annual deficits. Consequently, their insatiable thirst for debt risks ‘crowding out’ private sector investment, thus ultimately increasing borrowing costs. This risks stagflation; an inelegant term describing a combination of economic stagnation and inflation. We suspect it is far more likely than many believe.
