Realistically, the answer is nobody. This signals the somewhat laid-back attitude of investors towards dropping unemployment figures. The US and UK central banks each said they will raise interest rates if unemployment drops to a certain level (7% in the UK, 6.5% in the US). Latest data sets indicate that unemployment figures are inching ever-closer to central bank thresholds. However, in the more relaxed pre-holiday week the consensus is pinned on positive expectations that the UK and US governments will quite happily keep interest rates low beyond the 6-7% marks, at least until late-2014.
Historical approach
Historically this approach makes sense. The economic figure for full employment is nearer to 4% in the US, where the peak of employment cycle was just over 4% in 2007, while in 2000 unemployment was just about 4%. By contrast, at its worst the rate of unemployment stood at 10% in 2009. Most investors agree that in the interim, the thresholds set by central banks are achievable. Central banks are using their street cred to support the banking system, and the associated asset market. Governments are not slamming on the breaks but slowly unwinding extraordinary measures after central banks expanded balance sheets for quantatitive easing.
Deflation, rather than inflation
Fears of climbing interest rates that will eat into the real earning power of cash and push up inflation rates seem unfounded, at least in the near future. What has not entirely disappeared is the hovering menace of deflation, which dominated concerns at the beginning of the year. Sluggish pace of domestic demand, coupled with a 2-3% inflation rate, has been a constant battle for investors over the past couple of years.
Given investor confidence of stable interest rates alongside lingering fears of deflation, how should portfolio managers position their portfolios?
The general consensus on interest and inflation rates is worrying, according to Duncan Gwyther, chief investment officer at Quilter.
"Everybody has the same view, and this is disturbing. It usually means something unexpected is about to happen,” he said. Investors are buying shares in companies that benefit from an upturn in the economic cycle such as clothing retailers. Less money is being invested in staple companies where consumer spending is fairly consistent whatever the economic conditions.
According to Robert Jukes, global strategist at Canaccord Genuity, the latest news of Federal tapering raises plenty of issues to be concerned about as the statistics rely on broad-based labour market recovery, where recovery does not centre around permanent jobs but on a seasonal influx.
“Investors are seeking a positive real return, and to do this they need an asset that returns 2.1% or more,” he said.
Investors are not willing to push as high up on the risk curve as they had to in the summer when headline inflation was closer to 3% in the UK. Inflation drivers are unlikely to be as strong next year, so that it is possible that we see some risk rebalancing in favour of lower risk investments.
