Our latest Investment Strategy Quarterly looks at various geopolitical and macroeconomic themes, including consumer debt and employment, pension planning, and next year’s US election. Read all this and more in Investment Strategy Quarterly: Sailing on strange seas.
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.
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.
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.
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.
As reported last month, China is the largest constituent of most emerging markets and Asian benchmarks. After a strong rally in July, Chinese equities suffered in August, falling over 7% in sterling terms. This had the effect of dragging down the emerging markets and Asian indices.
Concerns surrounding Chinese growth have been growing over recent months. It is not just lower- than-expected growth that is plaguing the country, but also concerns around their real estate sector. Chinese property developer Evergrande, which faced a liquidity crisis in 2021, filed for chapter 15 bankruptcy protection in New York during August. Another property developer behemoth, Country Garden, did not pay two dollar bond payments, calling into question the state of the company, its liquidity and its balance sheet position. While the market has been aware of potential issues in the Chinese property market, there was an expectation that the Chinese government would step in with meaningful support and reform. However, to date, policy response has largely disappointed, with the lowering of interest and mortgage rates not viewed as significant enough to help the troubled sector recover.
Elsewhere, the weakness in equity markets at the start of the month was not driven by concerns of faulting economic growth; on the contrary, the continued surprising strength of developed economies led to a re-pricing of interest rates and inflation expectations. The higher-for-longer mantra led to equities de-rating. The good news for the economy was bad news for equity (and bond) markets. We view the good news being interpreted badly by equity markets as a short-term trend; we believe that healthy consumers and businesses should support company earnings and growth over time.
Following strong US Q2 GDP data, released at the end of July, the Atlanta Federal Reserve’s GDP Now forecast model estimated Q3 GDP to be running at a 5.8% annualised pace, fueled by strong industrial production and housing sales. This much stronger data showed the strength of the US economy, even in the face of higher rates. The market digested the news by increasing long-term inflation expectations due to a stronger economy, which would lead to higher demand, and also lowered the number of rate cuts it expects in 2024. It was the longer-dated (more interest rate sensitive) parts of the bond market that were hit hardest, with the yield curve steepening. Although GDP data from the UK was not as strong, we did see month-on-month GDP increase by 0.5%. This had a similar effect on UK markets; long-run inflation expectations rose, the yield curve steepened and bonds, alongside equities sold off. UK wage data put further upward pressure on bond yields, with average earnings including bonuses coming in at 8.2%, much higher than consensus. However, there were some positives with such strong wage growth; consumers are now experiencing real wage growth, given inflation fell to 6.9% in July (data released in August). The same is true in the US where wage growth is now rising faster than inflation.
While economic data for the first 20 days of August was strong, there was a clear deterioration in data towards the end of the month. Services and manufacturing Purchasing Managers’ Index (PMI) across Europe, the UK and US all made for dismal reading, showing most areas to be in contraction and falling more than expected. Durable goods orders from the US along with consumer confidence was also disappointing. This led to a reversal in some of the optimism about economic growth and led to lower bond yields (higher prices) while equities rose on the back of lower yields and interest rate expectations. The market was further supported by commentary from US Fed Chair, Jerome Powell, who spoke at the annual Jackson Hole Symposium. He appeared to be fairly dovish in his message, lowering the likelihood of significant interest rate rises going forward.
Over recent months markets have yo-yo-d up and down with little direction or clear trend. There seems to be extreme short-term thinking with most market participants currently, with every key data point moving markets. While it can be frustrating, this short-term viewpoint of the market is likely to create excellent opportunities for investors who can take a longer-term time horizon, look through the noise and exploit the short-term volatility. We have been attempting to do just this in recent months, across both bond and equity markets. We continue to see highly attractive long-term value across both bonds and equities. We want portfolios that can take advantage of the opportunities, but carry sufficient diversification, acknowledging the uncertainty the economy faces as we head into 2024.
Andy Triggs
Head of Investments, Raymond James, Barbican
Risk warning: With investing, your capital is at risk. Opinions constitute our judgement as of this date and are subject to change without warning. Past performance is not a reliable indicator of future results. This article is intended for informational purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.
Appendix
5-year performance chart
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.
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.
In this month’s Market Commentary, Raymond James’ European Strategist, Jeremy Batstone-Carr, discusses the global financial markets, takes a look at the UK and US economies, plus he examines recent challenges in China.
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.