Please see today’s Daily Investment Bulletin from Brooks Macdonald, received this morning:
What has happened
Tuesday saw something of collective risk-off in world markets following the higher-than-expected US manufacturing survey ‘Prices Paid’ print on Monday, its highest reading since July 2022. Stocks and bonds dropped in markets around the world as speculation mounted that major central banks might have to keep interest rates higher for longer. In the US the S&P 500 (-0.72% on the day) saw its worst daily performance in 4 weeks, and in Europe the STOXX 600 (-0.80% on the day) saw its worst daily performance in 7 weeks.
Better economic data signals resilience
Adding to the sense that we might be returning to a narrative where interest rates could stay higher for longer, Tuesday saw a clutch of perceived-resilient economic data. The latest US JOLTS job openings print (so-called as it’s the US Job Openings and Labor Turnover Survey), showed job openings in the US were at 8.756m, a shade higher than the 8.73m expected. Also out yesterday was US factory orders, where new orders for US manufactured goods rose by 1.4% from the previous month, above market expectations of a 1% increase and pointing to further resilience of the US economy. Responding to the data, US 10-year treasury yields were up 3.9 basis points (bps) yesterday to 4.35%, marking the highest level since November 2023. The moves were also echoed in Europe yesterday, with rises there for various 10-year sovereign bonds. Closer to home, the final UK manufacturing Purchasing Manager Index (PMI) for March was revised up to 50.3 (versus the initial reading of 49.9), marking the first print in expansionary territory (represented by a number greater than 50), since July 2022.
Oil prices firmer
Echoing the better economic outlook, oil prices edged higher on Tuesday, touching $89 per barrel at one point intraday for Brent Crude, a level last reached in October last year. Subsequently, they have opened at $89.22 per barrel this morning. As an aside, the broader Bloomberg Commodity Spot Index hit a 4-month high yesterday.
What does Brooks Macdonald think
The recent economic data, out of the US in particular, has pointed to an economic outlook on a relatively solid footing in aggregate, at least in terms of versus expectations. The flipside is that this seems to be driving a revival of the “good news is bad news” inflexion for markets. This is the reaction function, that with good economic news, the worry in markets is that this could drive something of a resurgence in inflation pressures, and could therefore push central banks into a corner where they are forced to have to keep interest rates higher for longer. As a result, the higher that bond yields go, the more they risk becoming a potential headwind for equity valuations, at least in the short-term .. as such, the markets’ risk-off move yesterday was a reflection of that.
Bloomberg as at 03/04/2024. TR denotes Net Total Return.
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Charlotte Clarke
03/04/2024