THE week has started with a boost to the reflation trade – that’s the idea that fast economic growth and rising prices will help companies most exposed to those trends.
In London, the FTSE 100 made healthy gains on Monday with miners and industrial stocks among the fastest risers. Both sectors stand to win in a reflationary environment.
The positive mood in the market is slightly at odds with weaker economic data from last week, with UK PMI numbers and US jobs softening. However, investors are clearly ready to look on the bright side, focusing instead on the fact that weaker economic news will reduce pressure on central banks to remove stimulus measures.
In Japan and China over the weekend there was talk of further stimulus to boost those economies – helping the mood in markets even more.
Many will be watching the latest gains for markets with some caution, particularly in the US. The S&P 500 hit another high on Thursday – practically a weekly occurrence these days – but for now investors appear in ‘risk on’ mode.
UK economic data at the start of the week includes PMI data for construction which showed Britain’s construction industry continuing to grow but at the slowest pace since the lockdown at the start of this year.
Much of the attention in the financial world, in the UK at least, will be focused on Westminster, and the likelihood of announcements on both social care and the triple lock for pensions. The Government has competing priorities here. On the one hand it needs to fulfil its pledge to tackle the problem of social care, where families face incredibly high costs if they need to fund care themselves.
On the other, it needs to pay for any extra spending and has floated a rise in National Insurance to do that – but that would mean breaking a manifesto promise to not raise taxes.
A rise in National Insurance is particularly controversial as it is mostly paid by working age people – you become free of NI once you reach the state pension age. The move has been criticised as unfair on younger people.
A tweak to the triple lock for the state pension may be offered as a way to reset the balance but that, too, is fraught with political danger. The triple lock promises to raise the state pension by the highest of any rise in inflation, any rise in wages or 2.5%. Right now, the highest of those is wages, where the official measure is forecast to come in around 8% higher than last year.
That is a largely artificial reading, however, caused by disruption in the figures arising from job losses in the pandemic and the furlough scheme. The Government must decide whether to honour the triple lock – or risk upsetting pensioners who already get one of the lowest state pensions among developed countries.
Elsewhere this week, companies reporting include Halfords and Morrisons, where a long-running takeover battle is set to be decided.