A measure of relative performance, it is the excess return over a benchmark.
Bank of England (BoE)
The central bank of the UK, originally established in 1694 to ‘promote the public good and benefit of our people’. In 1997 it became an independent organisation with two main functions; to provide monetary and financial stability. The Bank’s monetary policy objective is to deliver price stability and to support the government’s economic objectives including those for growth and employment. Price stability is defined by the government’s inflation target of 2% (as defined by CPI). The 1998 Bank of England Act made the Bank independent to set interest rates. It is owned by and accountable to the Treasury.
Bank of Japan (BoJ)
The central bank of Japan, also known as Nippon Ginko. The Bank carries out currency and monetary control with the aim of maintaining price stability. The price stability target set is 2% in terms of the year-on-year rate of change of the consumer price index (CPI). The Bank also sets the interest rates and issues currency.
The opposite of a ‘bull’; they are an investor who thinks the market, a specific security (such as shares or bonds) or an industry will fall in value. Given an improving economy can be bad for bond prices, an investor could be bullish on the economy and shares but bearish on bonds at the same time.
A statistical measure of the historic risk of an investment relative to a reference index or benchmark. An investment with a beta of 1 would be expected to move in line with the market. If the beta is greater than 1 the investment would be expected to rise and fall by more than the market and if less than 1 by less than the market. A negative beta means that if the market falls then the investment would be expected to rise.
The opposite of a ‘bear’; they are an investor who thinks the market, a specific security (such as shares or bonds) or an industry will rise in value.
Consumer Price Index (CPI)
A measure of the movement of prices in a range of goods and services that consumers use regularly, known commonly as ‘inflation’. CPI will generally be lower than RPI due to its calculation method. This is because CPI assumes that consumers buy less of something if its price goes up. Other key differences between CPI and RPI are that CPI does not measure the cost of owner-occupied housing and it complies with international calculation standards set for inflation measures. The UK government's stated policy is to use CPI for the indexation of benefits, tax credits and public service pensions. Both RPI and CPI include Value Added Tax (VAT) and other taxes but not necessarily the same or all taxes.
Shares in companies that are more affected by changes in the macroeconomic environment. By example, companies that produce or distribute goods and services which consumers cut back on when money is tight: fine dining and holidays.
Shares in companies that are less affected by the macroeconomic environment because they produce or distribute goods and services we always need: food, power, water and gas.
The opposite of inflation, it is a decline in the prices of goods and services. Not to be confused with disinflation.
A decrease in the rate of inflation, it is a slowdown in the rate of increase of the prices of goods and services. Not to be confused with deflation.
The opposite of a hawk, a dove prefers to see interest rates stay low or fall as a means of encouraging economic growth or inflation. By keeping them low or lowering them, doves believe that the demand for consumer borrowing increases and spurs consumer spending and corporate investment.
A measure of the sensitivity of a bond’s price to changes in yields. A bond with a higher duration will lose more if yields rise. In general, duration rises with maturity and falls as the yield rises or coupons increase.
Earnings Per Share (EPS)
The portion of a company’s profits allocated to each individual stock (share). It is a measure of the profits of a company.
European Central Bank (ECB)
The Bank was founded in 1998 to oversee monetary policy for those countries that use the euro. It sets key interest rates for the Eurozone and controls money supply. The bank must also maintain price stability by keeping the rate of inflation below, but close to, 2% over the medium term. It is run by a Governing Council, which is composed of members of the Executive Board and the Governors of National Central Banks.
Federal Reserve System (The ‘Fed’)
The Fed was established in 1913 to regulate the US monetary and banking systems. Its main roles are full employment and price stability. It is the bank of the US government and is headed by a government agency in Washington known as the Board of Governors of the Federal Reserve.
The opposite of a dove, a hawk prefers higher interest rates to keep inflation under control. Hawks prefer to focus on preventing inflationary pressure rather than stimulating economic growth.
The opposite of deflation, it is an increase in the general level of prices of goods and services. Moderate inflation is a common result of economic growth and a target of most central banks.
Central banks ‘loosen’ monetary policy by cutting interest rates or increasing monetary supply (quantitative easing).
The repayment date of a bond. The greater the time until the maturity of the bond, the more sensitive it tends to be to movements in interest rates (yields).
Price/Earnings Ratio (P/E)
The price of a stock (share) divided by its earnings per share (EPS). It gives investors an idea of how much they are paying for a company’s earnings. The higher the P/E, the more investors are paying for the earnings and it implies they are expecting more earnings growth and better prospects for the company. A forward PE is the price divided by the earnings expected over the next year as opposed to a trailing PE which is the price over last year’s earnings.
Purchasing Managers Index (PMI)
A survey measure of the economic health of the manufacturing, services, retail and construction sectors. Its calculation is based on a survey of new orders, inventory levels, production, supplier deliveries and the employment environment. A score above 50 implies expansion and below 50 implies contraction. A very similar measure called the ISM (Institute for Supply Management) survey exists in the US.
Quantitative Easing (QE)
A monetary policy tool implemented by central banks to stimulate the economy. It involves central banks creating money to buy government bonds and other assets, in order to lower longer-term borrowing costs and increase the money supply.
Retail Prices Index (RPI)
A measure of the movement of prices in a range of goods and services that consumers use regularly, known commonly as ‘inflation’. RPI includes some components that are not included in the other main measure of inflation, the Consumer Price Index (CPI) such as some elements of owner-occupied housing like mortgage interest payments. The UK government's stated policy is to use RPI for varying the value of index-linked gilts and of excise. Both RPI and CPI include Value Added Tax (VAT) and other taxes but not necessarily the same or all taxes.
The Standard & Poor's 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.
When a central bank ‘tightens’ monetary policy, they are effectively reducing the money supply in an economy that may be growing too quickly and therefore at risk of generating excessive inflation. This is normally done by increasing interest rates to make borrowing more expensive.
The total rate of return on a bond if held to maturity, taking into account the total of annual interest payments, the price, the redemption value and the amount of time remaining until maturity. When the yield on a bond rises, the price falls.