August predominantly maintained the enthusiasm driving the equity markets in July. As economic data released throughout the month continuously reaffirmed a view that inflation was peaking in many countries, investors continued to participate in an apparent recovery. However, in a last minute twist to round off the month, the hawkish tone from the Jackson Hole speech, delivered by the Federal Reserve’s Jerome Powell, threw markets back into a spin.
In the UK, August started with the BoE (Bank of England) increasing its benchmark rate by 0.50%, a historic moment when considering this is the first time it has taken such an action in 27 years. Aggressive for UK’s history, sure, but not when compared to the recent moves across the pond in the US (+0.75%) and Canada (+1.00%). More shocking than the rate hike itself, which was largely already priced in, was the guidance: inflation estimated to peak in Q4 2022 at 13%, citing higher energy prices as the main contributor. A forecast which was only further backed by July’s monthly figures posting an annual inflation figure of 10.1%, up from 9.4% in June. Given this, investors largely accepted the trajectory the BoE’s policy to remain on track for further aggressive rate hikes, which set the UK aside from other major markets this month.
Furthermore, the statement by the BoE claimed that the UK is expected to fall into a recession by the end of the year, as living costs will squeeze the consumer and lead to a decline in spending. This will help to offset the problems plaguing the global supply chain and bring inflation back to the BoE’s 2% target by 2024. Although this paints a gloomy picture, investors should be comforted by only a small increase expected in the unemployment rate (6.3% in Q3 2025 from 3.7% in Q3 2022).
Politically, the verdict of the next PM got a step closer, and Liz Truss emerged as the favourite going into September with a campaign promising to slash taxes to improve the cost of living crisis.