Client Login 0204 502 4321

Weekly Notes

The Week In Markets – 28th October – 3rd November 2023

This week we transitioned from October to November, leaving behind a very difficult month in markets, with the first few days of November proving very strong for equity and bond investors. We are just two days away from Guy Fawkes night, the conspirator who attempted to blow up the Houses of Parliament in 1605. November has certainly started with a bang as we have had multiple data releases and events causing fireworks in markets.

Arguably the most anticipated news of the week was the US Federal Reserve meeting on Wednesday. The base rate of 5.5% is a 22-year high and this went unchanged as the Fed opted to pause once more, following on from the previous meeting where rates were held steady. Market expectation was that the Fed would continue the pause to further see the impact higher rates were having on the economy. We have seen the US economy stand resilient despite the steepest rate rises in four decades, just last week we reported US GDP at 4.9% in the third quarter. Fed Chair, Jerome Powell was hawkish with his commentary as he stands firm on achieving the target inflation rate of 2%, however markets are convinced we have now seen the peak in rates, estimating only a small chance of an increase in the December meeting.

The Bank of England met on Thursday and followed suit as they also held rates steady at 5.25%. There was a change in the voting dynamic as Sarah Breeden succeeded Sir Jon Cunliffe on the monetary policy committee (MPC), and she was one of six to vote for rates to remain unchanged. Inflation played a vital role in the decision as it fell steeply in the month of July before staying sticky in the following months. It is estimated that inflation will drop further to 4.25% by the end of 2023. UK GDP projections for Q4 have weakened to 0.1% so the MPC must consider if this is now the peak in rates, as they do not want to overtighten policy, which could tip the UK into recession. There has been a huge change in UK rate expectations over the last 6 months, with the market believing in July that interest rates would be close to 7% by Q1 2024, which has now slipped to 5.25%.

Inflation in Germany has fallen to 3.8% in October (year-on-year), down from 4.5% in September. This is positive for the Euro zone as rates across Europe fall towards the 2% target, with the European Central Bank making it three out of three central banks to pause rates. The German economy however is still being weighed down as GDP fell by -0.1% for Q3. It has only grown twice over the last six quarters. There are concerns that the current geopolitical uncertainty will add further pressure to the economy as Germany still suffers from elevated energy prices since the war in Ukraine started.

Take a moment to guess what the Netherlands inflation rate for October was. Just two months ago it was 3% and preliminary results for the month of October came in at -0.4% (year-on-year). We can attribute this steep fall to the change in energy prices as gas and electricity peaked in October 2022. However, with a major European economy falling into deflation, it is a reminder how quickly outlooks can change.

The US Fed will have felt vindicated in their decision to pause, with US Non-Farm Payrolls data coming in weaker than expected on Friday. 150,000 jobs were added to the economy, against an expectation of 180,000. The slowdown in hiring is an indication that interest rates are continuing to bite, and the US economy is likely slowing as a result. 

It has been a very strong week in markets, with confirmation of central banks holding rates steady, coupled with a weakening in data, leading investors to believe that the headwind of rising interest rates may now be behind us. By the close of play yesterday the UK mid-cap equity index had risen 5.8% during the week, and at the time of writing is up another 1% today. The US S&P 500 index was up around 4.5% and again has nudged higher today. These weekly returns from equity markets are similar to the one year returns available on cash at the moment; it’s a reminder about the dangers of attempting to time markets. It wasn’t just equities that performed well, with bond yields falling (therefore prices rising). We wrote about the US 10-year Treasury yield reaching 5% last week; that has now fallen to 4.5%, providing significant capital uplift this week.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 14th October – 20th October 2023

Many of our readers will have likely noticed the recently rising prices at the petrol pumps. The impact of increasing oil prices in recent months fed through into UK inflation data this week, where headline inflation remained at 6.7%. While this is still the lowest level of inflation since February 2022, it was higher than expected, which was in part driven by oil prices, that have recently marched up to nearly $100 a barrel.

The UK’s inflation rate does remain an outlier when compared to most other developed market countries (USA, Germany, France), with energy and services once again leading the charge. The services sector includes rent prices, and this has consistently been a leading contributor to inflation. The Bank of England (BoE) paused on interest rate hikes at their last meeting, buying themselves time to assess the impact higher rates are having. Slightly higher inflation may encourage the BoE to hike rates in November, although it is still expected that inflation rates will fall as we head towards the end of the year.

UK wage growth data was released on Tuesday at 7.8% (excluding bonuses), meaning wages are growing at a faster rate than inflation for the first time since 2021. Chancellor, Jeremy Hunt, was very proud of this stating “It’s good to see inflation falling and real wages growing, so people have more money in their pockets”. However, future expectations for wage growth could see a slowdown as UK companies are becoming more reluctant to hire new staff; there was a slowdown in job vacancies to 43,000 in September hinting at a declining jobs market.

US Retail sales for the month of September was up 0.7% (month-on-month), smashing the market expectation of 0.3% as US households stepped up the purchases of motor vehicles and spent more at restaurants and bars. Any talks of a potential US recession is certainly over for now as the economy continues to show its strength. Despite the strong data, investors are more confident the US Fed will avoid another interest rate hike in their November meeting. The question remains, is the economy getting used to interest rates being “higher for longer”?

Sustained momentum in the US economy was also fuelled by a decline in the weekly jobless claims to 198,000. The number of Americans filing claims for unemployment benefits for the first time is now at a nine-month low showing the labour market is resilient as we head towards the end of October. This data is fantastic news for the economy, but we’ve seen that good news can be bad news for markets. The currently strong US economy helps fuel the “higher for longer” narrative, and as a result of this we have seen US bond yields continue their recent weakness. The yield on the 10-year US government bond reached new 16 year- highs, rising as high as 4.99% on Thursday. Concerns around US fiscal deficits have also led to rising bond yields. It will be interesting to see if the bond vigilantes lead to a change in fiscal approach in the US, similar to the situation 12 months ago in the UK following Liz Truss’ unfunded spending plans.  

“There are a million ways to make a million dollars in markets”, was once stated by industry expert, Jack Schwager. This statement is completely true and there are several approaches to investing, however we are consistent with our specific approach. We stress the importance of diversification within portfolios across asset class, sectors, styles and regions. This week has proved painful for investors as most asset classes have struggled, although there have been bright spots, such as gold and alternative strategies, including trend-following. Geo-political risks remain at the forefront of investor minds in the short-term. Concerns around potential oil embargos have led to increasing inflation expectations, which has hurt government bonds (which are typically a safe haven asset). Energy equities have outperformed the market and gold has been the asset of choice for safe-haven searching investors.

On a final note, for the England rugby fans, miracles can happen, although we think it unlikely we will be discussing an England win against South Africa in the semi-finals. Fingers crossed.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 7th October- 13th October 2023

The week in markets has resembled a see- saw; equities and bonds have been up and down all week. Short-term data and news flow continues to dominate investor thinking, leading to significant daily volatility. We will attempt to unpack the data releases below.

UK GDP data showed an improvement, with month-on-month GDP (for August) increasing by 0.2%. This follows a surprise contraction of -0.6% in July. There was weakness in the manufacturing and construction sector, although this was offset by the services sector. Housing data from RICS showed the housing market continues to struggle, as higher interest rates continue to act as a drag on activity and pricing. This week we heard from two of the Bank of England (BoE) Monetary Policy Committee members, Swati Dhingra and Huw Pill. Huw Pill stated it was “finely balanced” when discussing whether UK interest rates would be increased further. It was only a few months ago that markets believed UK rates could peak close to 7%. Now with rates at 5.25%, we may already be at the peak. The week has once again seen UK mid and small cap stocks underperform UK large cap stocks. This trend has been in place for most of the last two years, and we note with interest that the UK mid-cap index would need to rise over 40% to get back to September 2021 levels.

US inflation data for September was released on Thursday afternoon, as headline inflation came in at 3.7%, slightly higher than the forecasted 3.6%. Inflation (month-on-month) was 0.4%, again above the forecasted figure of 0.3%. Despite inflation coming in slightly above expectations, it is unlikely to be enough for the US Fed to raise interest rates in November; much like the UK we may be at, or at least very close to peak interest rates. The US market reacted badly to the inflation data however, with bond yields rising sharply (prices falling) and equities selling off, with the US mid-caps bearing the brunt of the pain.  

It appears that we have now seen the peak of German inflation, as inflation continues to fall steadily. September figures were released at 4.5% (year-on-year) which was in line with forecasts and a drop from 6.1% in August. Mr Joachim Nagel, president of the German federal reserve (Bundesbank) is convinced that the 10 previous interest rate hikes are helping tame inflation.

One country that is bucking the inflation trend is China. Data released on Friday morning showed year-on-year inflation to be 0%. Factory gate producer prices dropped by 2.5%, indicating that future inflation data is likely to be muted. Weak domestic demand continues to act as a headwind to China and may lead to further stimulus to support the ailing economy.

By Friday morning bond yields had fallen once again (prices rise), reversing much of the pain from Thursday. The price of gold has also risen over 2% on Friday (at the time of writing) to end the week higher. One of the standout equity markets this week was Japan, with the main index rising over 4%. The Japanese Yen continues to be very weak, which is helping to support the large exporters in the country.

The choppy nature of markets continues to be a frustration in the short-term. However, we need to try and take a step back, and focus on the bigger picture. Despite a slight month-on-month pick up in US inflation, the overall trend is clear, inflation is slowing. This should take the pressure off central banks to remain so restrictive in their monetary policy, which should help support markets. Next week we will receive the latest UK inflation data, which should continue to slow into the year end.

Andy Triggs, Head of Investments & Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week in Markets – 30th September – 6th October 2023

We have now entered the tenth month of the year, October and it’s certainly now tradition to educate on history of the month. The Anglo-Saxon’s name for October was Winterfylleth, meaning winter and full moon. It’s certainly beginning to feel like winter after record high temperatures just three months ago.

The beginning of the week saw members of the US Fed come out and speak on the future of rates as Fed Governor, Michelle Bowman, confirmed she would be in favour of future rate hikes if “progress of inflation had stalled”. The main reason behind the pause in US rates during the September meeting, was for the Fed to assess the impact of the rate cycle. Investors now believe the door is still open for a further rate hike before the end of the year and the market narrative “higher for longer” has dominated markets.

US jobless claims data was released on Thursday afternoon, coming in at 207k, just under forecasted 210k. This points towards still-tight labour market conditions which will not be welcome news for the Fed. News has fed through to US treasury bond yields as we have seen huge daily moves this week. On Thursday we saw the US 10YR treasury set a 16 year high at 4.88%.

US Non-Farm Payroll (NFP) was released this Friday afternoon with 336,000 jobs created, smashing market expectations of a 170k increase, further indicating the strength of the US labour market. This is the largest monthly increase since February 2023.

German-based company, Birkenstock, the luxury sandals brand is planning its IPO next week on the New York Stock Exchange. The sandals brand has become extremely popular over the past couple of years in line with the comeback of the Crocs brand. Birkenstock has the backing of heavyweights as the Louis Vuitton private equity firm, L Catterton, will own approx. 83% of the brand after the offering. This is another example of companies choosing not to list in their native country and rather make the switch to the US!

UK Prime Minister, Rishi Sunak, this week was accused of the most “damaging U-turn in the history of UK infrastructure” as he announced the scrapping of the northern leg of the high-speed train (HS2) project. The train was planned to run from Birmingham to Manchester, cutting travel time to approx. an hour and there was hope for it to become a vital connection between the South and the North. The decision was announced with several other new policies such as the scrapping of A-level qualifications to create a new “Advanced British Standard” and a tax-free bonus for new teachers up to £30,000. Certainly, bold decisions to make before the election in 2024.

A new month certainly does not mean any changes to our investment philosophy. The message of diversification is as key as ever with the moves we have seen in the bond markets. This also reiterates the importance of long- term investing as opportunities are created by short term moves.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 23rd September – 29th September 2023

After a poor start to the week in markets there was a welcome rally towards the end of the week. There was positive news specifically around job creation in the UK, with the approval of the Rosebank offshore development. Rosebank is in the northernmost region of the UK and is currently the most untapped oil field, estimated to contain 300m barrels of oil. Development of this is set to create approximately 1,600 jobs but most importantly for the UK government, will reduce the overreliance on external supply.

Staying on the environmental path, the UK has seemingly lost its “Climate Crown” as earlier this week, Prime Minister Rishi Sunak, pushed back several climate change targets from 2030 to 2050. The most prominent was the pushback on the sale of petrol and diesel cars. Sunak claimed he remained “committed” to the legally binding target of 2050 and announced the UK could afford to make slower progress due to being “so far ahead of every other country in the world”.

US data points are the most anticipated releases, and it can be quite tough to predict how markets will react. On Thursday we saw US GDP for Q2 come in as expected at 2.1%. The economy remains resilient as Q1 data was revised at 2.2%, this can be seen as ammunition for the US Fed to keep rates “higher for longer”. Initial jobless claims came in at 204,000, lower than the expected 215,000 as the US labour market remains resilient. Strangely enough we saw huge moves in the bonds markets this week before the data releases as yields rose further Wednesday with the US 10-year yield reaching 16-year highs.

Amazon has now played their hand in the Artificial Intelligence (AI) space as this week they announced investment of up to $4bn in a high-profile start up, Anthropic. Anthropic is an AI research and development company and amazon is hoping this investment can be their biggest challenge to Nvidia and Microsoft who have led the way in developing AI. Amazon customers and employees are set to gain early access to Anthropic features such as customising their AI when using the service.

German inflation well and truly may have seen its peak as it fell to 4.5% (year-on-year) for the month of September. This is a significant fall since the 6.1% reading in August and is the lowest level of inflation since Russia invaded Ukraine. While falling inflation rates is pleasing, the effects of rising interest rates within the country is still yet to be fully felt, and investment and consumption is already slowing. We have recently seen downgrades for German GDP for 2023, reflecting the recent slowdown in the economy.

As an investment team here at Raymond James Barbican, we maintain our key message of diversification within portfolios and long-term investment opportunities. Bond market volatility has picked up this week, showing the importance of considering a wide range of equity diversifiers, including cash and alternative assets. That being said we continue to identify considerable opportunities in the bond market space; short term commotion can certainly create opportunities in the long run.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 16th September – 22nd September 2023

Central bankers were firmly in the spotlight this week, with the US Fed and Bank of England (BoE) meeting to set interest rates. Investors focused on both the interest rate decisions and the accompanying statements, to help determine the future path of interest rate policy.

On Wednesday the US Fed held interest rates steady in the US, referred to as a “pause”. While it is possible that we have reached the terminal (maximum) level of US rates in this cycle, the guidance given by US Fed Chair Powell, intimated at one further rate hike in 2023. The US Fed upgraded their economic growth expectations for 2023 and 2024 and with it they expected to keep rates higher for longer in the face of a stronger economy, which is able to tolerate higher rates. Despite not raising interest rates both US equities and bonds sold off on the news. The tech-heavy Nasdaq index, which has been a standout performer this year, bore the brunt of the pain, falling over 1% on Wednesday and Thursday. The US 10-year government bond yield touched 4.5% on Thursday, its highest level since 2007 as investors braced for higher interest rates and inflation over the medium term. The underlying strength of the US economy has been reflected in a rally in the USD against a broad basket of currencies.

Following the pause in the US, the BoE followed suit on Thursday, keeping rates steady at 5.25%. This was a slightly unexpected decision, although the odds of a pause did increase after inflation data was released on Wednesday. Headline inflation in the UK was 6.7%, marking the sixth straight month that inflation has fallen. Core inflation, which strips out energy and food, was reported at 6.2%, considerably below the expectation of 6.8%. While inflation is still clearly an issue, there is now growing evidence that it is moving closer to target and should continue to throughout 2023. This is despite rising oil prices, which have been putting upwards pressure on inflation. It was a split decision for the BoE, with five members voting to keep interest rates at 5.25%, while four members voted for an increase to 5.5%.

Wednesday’s inflation data led to a big jump in UK equities, led by the more domestically facing mid-cap index. Government bond yields also fell (prices rose) as investors lowered interest rate expectations. We also witnessed the pound dip below 1.23 versus the USD this week.

On Friday morning Purchasing Managers’ Index data for Europe and the UK largely disappointed. There was a larger than expected contraction in the UK services sector, which will make the BoE feel vindicated in their decision not to tighten policy any further.

It’s been a mixed week in markets as investors digested the key interest rate decisions. Once again diversification has been important, with unloved UK government bonds outperforming the US this week, while UK equities have also fared better than most – this has been a reversal of 2023 trends to date. Economic data continues to be mixed and we are mindful of the long and variable lags of tighter monetary policy, which leads us to take a diversified and cautious approach to portfolio construction.

Andy Triggs, Head of Investments

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 9th September – 15th September 2023

Today marks the 15th anniversary since Lehmann Brothers filed for bankruptcy. The news of Lehmann Brothers going under, an institution many deemed too big to fail, led to global equities falling around 5% on the day. Thankfully, today, and this week, equity markets have been a lot kinder to investors.

We will start with the UK where equities posted around a 2% rise on Thursday, with the large cap index up close to 1% on Friday morning. We received mixed data this week from the UK, with record high wage growth reported alongside rising unemployment (4.3%) and GDP contracting on a month-on-month basis. In aggregate it appears the UK economy is now slowing under the weight of higher interest rates, and the Bank of England are unlikely to continue much further with their rate hiking strategy. Over the summer months terminal UK rates were expected to be north of 6.5%, that number is now closer to 5.5%. The lower growth and lower interest rate expectations led to sterling falling against the USD to 1.24, a three-month low. While the expectation of lower rates helped UK equities, there was another kicker for sectors such as mining as China announced new stimulus measures to help their flagging economy. Anglo American rose over 7% on Thursday, while companies such as Glencore also posted strong returns.

US headline inflation rose to 3.7% on a yearly basis, the second consecutive month inflation has nudged higher. The recent pickup in oil prices is seen as one of the drivers of the acceleration in inflation. Despite the elevated inflation number, the US Fed is still expected to pause at their meeting next week and not raise interest rates any further. The prospect of an end to the rate hikes buoyed US equities and led to bond yields declining.

On Thursday China’s central bank lowered banks reserve requirements in an effort to increase liquidity and stimulate growth. This is the second time this year that reserve requirements have been cut. After months of poor economic data both retail sales and industrial production in China came in above expectations. This may be an early sign that prior policy measures are beginning to kick in and support the world’s second largest economy.

Oil prices have continued to rise this week driven by supply cuts from Saudi Arabia and Russia. Brent crude rose above $92 a barrel for the first time this year. Central banks will be watching the oil price closely given its impact on inflation.

British chipmaker Arm, which is based in Cambridge, listed on the Nasdaq this week in the biggest initial public offering (IPO) since 2021. The stock listed at $51 a share, valuing Arm at $60billion, however by the end of the day the stock had risen by 25%. The decision of Arm to not list in the UK was a bitter disappointment to many in the UK government and may lead to reforms to aim to encourage companies to list in the UK.

As investors it is important to study history and see if there are any lessons that can be learnt. 15 years ago, it felt like a very difficult time to invest, and yet those investors who were able to look through the short-term issues and take advantage of panicked sellers and cheap valuations went on to make highly attractive returns over the next 15 years. While Lehmann Brothers going bust didn’t signify the very bottom of the market (this was March 2009), it was a fantastic long-term entry point, nonetheless. Timing the markets is notoriously hard, yet buying when others are fearful, is often a sensible strategy.

Andy Triggs, Head of Investments

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 2nd September – 8th September 2023

The start to September in markets has not kept pace with the rising temperatures we have witnessed in the UK this week. Temperatures have hit above 30 degrees for four consecutive days,  setting a new record in the month of September, with the potential to make it five or six days if the weather keeps up this weekend. Fingers crossed!

As we head towards the next US policy meeting on the 20th of September, the US Fed and market participants alike will be picking apart the data points that are released in an effort to determine whether further rate hikes are warranted. Purchasing Managers Index (PMI) is a leading indicator of economic trends within sectors and have been the leading factor for market moves over the last two weeks. The US services sector for August has surprised to the upside, rising to 54.5, the highest reading since February and indicating an expansion in the services economy. The economy strengthening in theory is good news, it downplays the effect that the rate hikes have had on the economy and should support labour markets and consumers going forward.

Personal Consumption Expenditure (PCE) is not the most common index but is the US Fed’s preferred measure of inflation, as it calculates inflation but considers buying habits and saving levels. PCE for the month of July showed a rise to 3.3%, a jump up from 2.9% in the previous month and confirmed US consumer spending was still resilient with increasing spending in restaurants and concerts. Inflation remains greater than the strict 2% target the US Fed has set and investors will eagerly await the next meeting. 

US initial unemployment claims came in better than expected on Thursday, a further indication of strength in the labour market. While there are signs of pockets of weakness in US labour markets, the overall picture continues to be a positive one, which in theory should help support equity markets in the near term.

Strikes have been a common topic this year and the latest to shock markets is at Chevron’s Australian natural gas plant. Australia is the world’s largest liquified natural gas exporter, and the confirmation of worker strikes over wages and working conditions has led to a spike in European gas prices. The strikes have been designed to place significant pressure on Chevron and force them to cut a deal before production is substantially affected. A total shutdown of the facilities would be chaotic, immediately causing an energy crisis in Australia that would require the government to intervene. The same strike tactics were employed on domestic gas producer, Woodside energy, leading to a deal raising wages and making it harder for the firm to hire contractors, improving existing employees job security.

Shares in Apple tumbled almost 6.5% over the past two days, wiping $190bn from its market cap following the news of a China ban on iPhones. Employees at government owned firms have been told to stop using the iPhone with many companies offering subsidies to incentivise the switch to local brands. Huawei, China’s leading phone manufacturer, have also launched two new phones in the push against Apple with smartphone sales estimated to jump almost 70%. Given Apple is the largest constituent of the major US and global equity indices, weakness in the share price weighed heavily on markets.

Bank of England (BoE) Governor Andrew Bailey indicated this week that UK rates are likely to be “near the top of the cycle” as the BoE expects inflation to continue to drop towards the end of the year. The back-and-forth on interest rate expectations has led to volatility in the bond market; it was only a couple of months ago that certain commentators were predicting UK rates to peak at 7%, the peak rate is now expected to be below 6%. Bailey’s words led to a weakening in sterling versus the USD, falling below 1.25, a 3-month low.

Weakness in Apple this week reinforces our message of diversification and being aware that even seemingly great companies can face headwinds. Our equity exposure in portfolios remains diversified across sectors, styles and geographies. The fixed income component of portfolios is focused on high quality bonds which are now paying attractive nominal yields, which will form the bedrock of portfolios going forward.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 26th August – 1st September 2023

Today we enter the month of September so it’s only right we start off with a fact of the month. The Romans often related different months with different Gods and September is connected with Vulcan, the God of Fire, due its fiery hot weather. It has also been reported that the UK will be hit by a mini heatwave, living up to the September myth.

Last week we reported that the annual Jackson Hole Symposium was taking place on the Friday, with key economic policymakers scheduled to make a speech. Arguably the most powerful man at the event, US Fed Chair Jerome Powell, looked to deliver a less hawkish message than the previous year, stating the Fed would be “moving with care” to evaluate data points. Progress towards the 2% inflation target has been significant as the US Fed brought inflation down to 3.3% from its peak, having raised rates by 5.25% since March 2022. Mr Powell ended his speech once again stating the importance of “holding policy at restrictive level” until inflation falls viably to target, however investors have begun to speculate whether we are already at the terminal interest rate. Markets rallied on the back of Powell’s speech with US equities advancing either side of the weekend and US government bond yields falling (prices rise).

 US GDP Growth for Q2 was released on Thursday, growing 2.1%, just below the 2.4% market expectation. The downgrade in US GDP growth will be a data point the US Fed consider before their next meeting in September and could strengthen the argument for a potential pause as the Fed will not want to further hamper the US economy. Investor views are heavily divided between a potential recession and the “soft landing” scenario that we describe as inflation falling close to target, with labour markets and economies remaining stable. There was further “bad news” from the US with the job openings data disappointing. Markets reacted to the weaker data this week positively, believing it pointed towards the US Fed no longer needing to raise rates. Equities carried on the momentum from Jackson Hole and advanced further.

US Non-Farm Payroll (NFP) was released this Friday afternoon with 187,000 jobs created, ahead of market expectations of a 170k increase, signalling the continued strength of the US labour market.

Euro zone inflation data was released on Thursday, defying expectations. The Inflation rate (year-on-year) was 5.3% for August, the same as the previous month but greater than the 5.1% markets expected. Inflation rates from Germany, Spain, Italy and France all came in higher than expected, which will be a cause for concern for the European Central Bank. Higher oil prices could also put upwards pressure on inflation later in the year. The oil price has continued to move higher this week.

Covering news in the UK, this week Nationwide reported house prices fell by -5.3% (year-on-year) in the month of August, the fastest annual drop over the last 14 years. Putting this into perspective, the average house price is more than £14,500 cheaper then reported a year ago. However, the steep rise we have seen in interest rates have made affordability difficult for buyers, with many having to wait until rates settle. House sales are 40% down from 2021 where we saw a housing sales boom after a period of low interest rates, the build-up of household savings due to covid lockdowns and the stamp duty holiday.  

The start of September also signals the transfer deadline for football fans. As an investment team we aim to avoid making last minute panic decisions in portfolios and prefer to have structure and a long-term process around our decision making.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

The Week In Markets – 19th August – 25th August 2023

The final full week of August has been a mixed bag, with markets oscillating on the back of various data releases.

In what was a data-light week, Purchasing Managers Index (PMI) data from the UK, Europe and US took centre stage on Wednesday. PMI data is essentially an index of the prevailing direction of economic trends in the manufacturing and services sectors. A reading above 50 typically indicates expansion, while below 50 signals a contraction. The data released on Wednesday for all the regions was universally weak, falling below consensus, and pointing to contraction in all but US services, which was marginally above 50. Despite weak data, both bond and equity markets rallied strongly on the day, as the market interpreted the data to mean that central banks may not need to increase rates much further, as there are signs the economies are slowing. The US S&P 500 index rose close to 1.65% on Wednesday, while 10-year UK gilt yields fell by over 15 bps, which is a very large one day move. 

On Wednesday evening the hotly anticipated Nvidia quarterly results were released. Similar to last quarter, the company released much better results than expected, and also gave very positive forward-looking commentary, with demand for the chips (often used in artificial intelligence) growing rapidly. This time however, the share price reaction on the day was fairly muted, while the broader technology sector fell on Thursday.

US initial jobless claims data was released on Thursday and once again sent mixed messages to markets, as the better-than-expected results pointed towards a resilient labour market.  

Positive news was released in the UK as OFGEM, the government’s regulator for electricity and gas, announced a new price cap with the typical household bill to fall below the £2000 mark for the first time in 18 months. Falling energy costs will filter into headline inflation over the coming months. Staying with the UK, consumer confidence unexpectedly improved this month and consumer inflation expectations continued to fall. Despite higher interest rates, it appears that consumers are feeling more positive on the outlook now that inflation appears to have peaked, energy prices are falling, and wage growth remains strong.  

Germany is Europe’s largest economy, and their Q2 GDP data was released this morning. The economy contracted by -0.2% (year-on-year), in line with market expectations and flatlined at 0% (quarter-on-quarter) which just edges Germany out of a technical recession (typically defined as two consecutive quarters of negative growth). Consumer spending increased by 0.1% in the second quarter, but it was poor trade data that heavily weighed on the country as exports fell -1.6% and imports fell -1.8% compared to the previous quarter.

Apart from the bank holiday, investors are looking forward to the commentary from this year’s Jackson Hole symposium. The Jackson Hole symposium is a three-day annual conference that takes place in the state of Wyoming and hosts central bank leaders from all around the world.  US Fed chair, Jerome Powell, and ECB President, Christine Lagarde, are set to speak at different times during the event. Last year, Mr Powell’s speech was well remembered as he stated the Fed’s determination to tackle inflation, before embarking on the steep interest rate path we’ve seen over the last year. This year investors are expecting a less hawkish tone, given inflation has fallen from over 8% this time last year in the US, to 3.4% currently.

Do enjoy the bank holiday.

Nathan Amaning, Investment Analyst

Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.

Loading...