It has been a tricky week in markets, with equities and bonds coming under pressure in developed markets, while data from China continues to indicate that the world’s second largest economy is weakening.
Last week’s confirmation of deflation in China was backed up this week by weaker than expected industrial production. There was also the surprise development that China will no longer be reporting on youth unemployment while they “optimise labour force survey statistics.” The last figure from June showed youth unemployment was 21.3%, and one questions whether China would have suspended youth unemployment data if the reading was a little more positive! In response to the continued weakening data there was surprise policy rate cuts for the second time in three months to try and stimulate the economy.
There was mixed data from the UK this week, with wage growth data coming in at the highest level since comparable records began in 2001. The figure of 8.2% (including bonuses) for the three months between April and June will make for uncomfortable reading for the Bank of England (BoE) and is likely to lead to further interest rate rises. Despite the acceleration in wage growth, unemployment nudged up to 4.2%. Wage data was followed by inflation data, with headline inflation continuing to fall, coming in at 6.8%. While it is pleasing that inflation continues to trend lower, core inflation (excludes food and energy) stayed at 6.9%, while services inflation increased to 7.4%. The impact of this was for bond markets to change expectations once again for peak UK interest rates, which have now moved out to 6%.
On Wednesday we saw the yield on the US 10-year Treasury bond hit a 15-year high on the back of stronger than expected industrial production data and the release of the latest US Fed meeting minutes. The US economy continues to perform ahead of expectations which has led to a more consensual view that a US recession is less likely. This has led to inflation expectations over the longer-term increasing, pushing yields higher. UK government bonds also sold off this week, with the 10-year government bond yield breaching 4.7%, the highest level this year. Like the US, the UK economy is growing faster than economists had expected; the higher economic growth is expected to lead to more sticky inflation.
Much like 2022, higher bond yields have been a headwind for equities recently. The tech-heavy Nasdaq index, which had a very strong H1 2023, closed at a six-week low on Wednesday. There was some excitement in the IPO market, with Vietnamese electric car maker Vinfast listing this week. The share price more than doubled on open and at one point during its first trading day the share price had risen from $10 to $37! This valued the loss-making EV carmaker at more than Ford and BMW.
This was a tough week for most asset classes, continuing the weakness in August, after a strong July. The day-to-day noise can be uncomfortable and focusing on it too much can encourage short-term decision making, which we believe is often not in the best interest of returns. The bigger picture continues to point to economies proving resilient to higher interest rates, while inflation, in general has been trending lower from recent peaks over the last 12 months. This is accompanied by some of the highest yields available on bonds in 15 years and below average valuations for much of the equity market, all encouraging signs for future returns.
Andy Triggs, Head of Investments
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