Blogs

Please see the below article from Brewin Dolphin which covers their views on recent events in markets:

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Andrew Lloyd DipPFS

22/11/2023

Please see the below article from Tatton Investment Management, received this morning – 20/11/2023.

Overview: Inflation genie back in the bottle?

Last week was another good one for most investors. In sterling terms, the strongest equity markets were in Europe with the DAX up 4.5% over the week, the biggest winners being small and mid-sized firms. Risk asset markets are benefitting from the perception that central banks have reached their tightest levels in terms of interest rates and that from here, rates will move lower. That perception grew stronger last week. Yields on 10-year government bonds were down another 0.2%-0.3% in the UK, Europe and the US, and the move was even stronger for shorter-dated maturities.

Thinking we are through the worst is tempting, but is also dangerous. Indeed, central banks moving from tightening policy to easing is also a sign that economic growth is not going so well. And if growth is not going so well, profits may be under pressure. We have one more set of 2023 central bank meetings in December. Investors have been positive about prospects of dovish announcements, but we will need to hear that it’s more than okay to talk about rate cuts – which was certainly opposite to what central bankers stressed earlier in the month.

Lastly, the US dollar has weakened as the US growth exceptionalism appears to be running out. We think that this has the makings of an important shift, one which could be important for longer-term economic and investment outcomes. We will cover this in more detail in our 2024 outlook, which we will publish in mid-December.

Why fragile growth is now the key concern

One year ago, high levels of inflation were the greatest anxiety for investors and policymakers. For much of this year, the pace of price rises has declined but in order to achieve this, central banks have raised interest rates to cool down demand and so the world’s economy has slowed. That slowing has done its job, with an increasing impact on inflation. Now though, the fragility of global growth is a greater concern for investors than the possibility of another bounce in inflation.

We know that if policymakers want to guide demand in their economies, they face a very difficult task. If economies continue to drift below potential and the pace of inflation continues to move down in developed nations, ‘higher’ won’t be for ‘longer’. However, we would remind everyone that not taking monetary policymakers at their words has been a losing game all year long. Caution should particularly be taken with the US Federal Reserve (Fed). The Fed is in many ways the leader of the ‘higher for longer’ chorus, because the US economy is leading the developed world. According to JP Morgan’s nowcast, for example, US growth dipped only mildly below potential into the end of 2022, then bounced back to record a blistering 4.9% seasonally adjusted annual rate from July to September, obviously above potential. Over only a few weeks, growth has now shifted back below a 2% potential estimate. Unemployment has risen slightly to 3.9%, but is still below the Fed’s 4.5% estimate of employment balance.

So, while there is some logic to expecting rate cuts from the BoE and ECB, expecting them from the Fed – as many now are – looks riskier. Moreover, the whole picture is complicated by the fact that developed world central bankers take their cues from each – and so often particularly from the Fed. It may take yet more weakness and fragility to really change their minds.


China begins to realise its potential

For western investors, China has been the biggest disappointment of the year. A post-Covid boom looked like a sure thing 12 months ago, but economic activity has been lacklustre, held back by an ailing property sector and weak domestic demand. While most developed economies have struggled to contain sky-high inflation, China has been flirting with deflation all through 2023. Accordingly, the stock market rally into the end of last year has well and truly unravelled. A consistent slide from January leaves mainland China’s benchmark CSI 300 index barely above where it was in October 2022 – its lowest point during the entire pandemic.

However, things could be turning in the world’s second-largest economy. Chinese consumer demand and industrial activity both came in stronger than economists expected in October. Retail sales showed 7.6% year-on-year growth last month, beating expectations of 7% and comfortably above the 5.5% figure from September. Industrial production was more muted but showed marginal improvement on the month before, 4.6% for October versus 4.5% for September – and was the sector’s strongest return since April. Just as encouraging is a potentially powerful fiscal boost. According to Bloomberg, Beijing is considering giving up to RMB 1 trillion for urban village redevelopment – most likely through its pledged supplementary lending (PSL). The throwback to 2015 policy – the zenith of Beijing’s credit-growth model – is likely in part to appease those nostalgic for the good old days.

Beijing excited markets last year when it hinted at monetary and fiscal easing – supposedly aimed at stressed property developers – but actual measures were relatively moderate and a far cry from previous episodes, most notably in 2015, when Xi Jinping’s government wielded its policy ‘bazooka’ to turbocharge the economy. And yet, last week we saw the clearest signs of increased firepower as the People’s Bank of China (PBoC) gave out RMB 1.45 trillion through its medium-term lending facility, the central bank’s biggest splurge since the heady days of 2016. Repeating old policy does not guarantee the same results, of course, but it is possible that liquidity injections from the PBoC could help to enable markets to connect to an improving economy.

The government is clearly alive to how weak China’s economy has been, and will know that rebuilding confidence will take time. Chinese companies have endured a long period of selling and, in some cases, have already lost much of their foreign-linked backing. This is no doubt one of the reasons for President Xi’s conciliatory approach to the US, exemplified by meeting President Biden in San Francisco last week. While concrete policies rarely come from such high-level meetings, it is an undeniable show of China’s willingness to normalise US relations after the tensions of the last few years. What that means for the Chinese, American and global economies depends on whether Washington feels the same.

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Charlotte Clarke

20/11/2023

Please see below, Brooks Macdonald’s ‘Daily Investment Bulletin’ which details recent economic data releases and central bank policy news. Received this morning – 17/11/2023

What has happened?

Bond and equity markets received another burst of enthusiasm yesterday after economic data painted a more challenging picture than the day prior. Oil prices continued their decline, adding to the risk on mood, with both Brent Crude and WTI falling more than -4% on the day.

Economic data

 The high frequency initial jobless claims, released weekly, spiked to their highest level since August, adding to the evidence of slowing labour market momentum. 231k people filed for unemployment benefit in the preceding week compared to expectations of just 220k. Continuing jobless claims have also hit their highest level since late 2021 and were slightly higher than the market expected. Industrial production was also weaker than expected, contracting by -0.6%. Lastly, the NAHB housing market index was also weak, recording its lowest reading since December. These data releases added to the belief that economic growth was slowing sufficiently to reduce the demand side of inflation and increased the chances of a soft landing being achieved.

Central banks

 While bond yields fell yesterday, Federal Reserve speakers did little to support the market’s view that interest rate cuts would be on the table next year. President Mester said that it was far too early to discuss interest cuts as the Fed needed confidence that inflation was on a sustained, lower path. Mester said that easing monetary policy ‘is just not part of the conversation right now.’ Governor Cook struck a similar tone, saying that recent signs of economic strength, such as the Q3 GDP release, suggests that demand remains strong and that could ‘slow the pace of disinflation.’ Neither of these speakers deterred the bond market which increased its probability of an interest rate cut as soon as the March 2024 meeting.

What does Brooks Macdonald think?

 The last fortnight has seen a resurgence in risk appetite but this week has shown that the movements are far from one-way as investors are highly aware of the risk of another ‘false pivot’. The market’s pricing of US 2024 interest rate cuts looks quite aggressive given the stickiness of core CPI readings and the rhetoric coming from Federal Reserve speakers. Given this, markets are likely to continue to swing towards bouts of optimism as pessimism as we are still some way from confirming that inflation is on a sustainable path to the Fed’s 2% target.

Please continue to check our blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Alex Kitteringham

17^th November 2023

Please see the below article from Evelyn Investment Partners detailing their thoughts on the UK inflation announcement for October. Received this morning 15/11/2023.

What happened?

UK October annual headline CPI inflation was reported at 4.6% (Bloomberg consensus: 4.7%), its lowest pace in 2 years, versus 6.7% in September. In monthly terms, CPI was flat (consensus: +0.1%), compared to a rise of 0.5% in September.

What does it mean?

The downward trend in inflation is continuing following this CPI print. A year on from headline CPI of 11.1% in October 2022, it has since decelerated by over 6% points, with much of that deceleration coming from lower energy prices in the transport (i.e. fuel) and housing and household services (i.e. gas and electricity) categories.

As it stands, Brent crude oil prices are now down slightly for the year despite heightened geopolitical risk in the Middle East and OPEC+ output cuts. This reduces the risk of upside in retail petrol and diesel fuel prices.

Moreover, the drop of the Ofgem regulator price cap has been another driver of lower CPI inflation. The further good news for households is that wholesale natural gas prices have remained low although peak winter demand has yet to come. For the moment, there is no evidence of a sharp acceleration in natural gas (or electricity) prices that could impact future inflation data.

Today’s CPI figure supports the narrative that we have reached the end of the BoE’s rate hike cycle with the base rate at 5.25%. There is conflicting opinion within the Bank of England (BoE) Monetary Policy Committee as to when rate cuts will occur, with the BoE Chief Economist, Huw Pill, hinting at rate cuts sooner than expected. However, BoE governor, Andrew Bailey, downplayed these comments and reiterated the need to reduce inflation to the target level of 2%. The futures’ market expects base rate cuts around the second quarter of 2024.

Bottom Line

The broader trend of inflation deceleration is continuing with the aid of lower energy prices. This suggests that we have peaked in interest rates and that cuts are to be expected in 2024.

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

15/11/2023

Please see today’s Brooks Macdonald’s Daily Investment Bulletin received this morning:

What has happened

Monday saw somewhat of a lull for equity and bond markets with investors awaiting today’s US CPI report before making any decisive moves. There was a modest recovery in Brent Crude oil prices after the declines of recent weeks, leading energy to be one of the best performing equity sectors on the day. European equities, which had missed out on some of Friday’s rally in US markets which took place after the European close, climbed three quarters of a percentage point.

UK

The UK saw a significant shakeup in senior cabinet staff yesterday after the removal of Suella Braverman as Home Secretary. That role will be replaced by James Cleverly alongside the eye-catching return of David Cameron (via the House of Lords) to government through the role of Foreign Secretary. Today sees the latest UK employment data which has been the subject of a review by the ONS after being delayed last month due to worries over its statistical quality. Average Weekly Earnings dipped slightly but the reading including bonuses was far stickier than markets were expecting, which will keep the pressure up on the Bank of England.

US CPI

Today’s main event will undoubtedly be the US CPI release which comes at 1:30 pm UK time. The market is expecting a headline month-on-month growth of 0.1% and for that to bring the year-on-year reading down from 3.7% to 3.3%. The core reading however is expected to remain sticky, at 0.3% month-on-month, which keeps the annual number at 4.1%. Stubborn core inflation will be an unhelpful narrative for the Federal Reserve to deal with as it seeks to strike a balance between economic and inflation risks.

What does Brooks Macdonald think

Inflation has clearly fallen significantly since its peaks however the risk now is that US inflation now settles at an elevated level and proves difficult to shift. The demand side of inflation has been far more resilient than most economists believed, with excess savings supercharging consumption over the last 3 years. Should this still have further to run, the Fed may be forced to consider further interest rate hikes even though the recent tightening of monetary policy is yet to fully run its course through the US economy.

Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Andrew Lloyd DipPFS  

14/11/2023

Please see the below article from Tatton Investment Management providing a brief analysis of markets and the key news from global economies over the past week. Received this morning 13/11/2023.

Overview: Back-pedalling central bankers

The turnaround rally in stock and bond markets – prompted by dovish central bank comments – petered out towards the end of last week, with central bankers at pains to reverse their messaging, or at least reaffirm their commitment to keeping rates high for as long as it takes to get inflation back to their 2% target.

This comes against the backdrop of seemingly having passed through the peak in nominal growth (real growth + inflation) and are now heading back down to more normal levels. In most cycles we would expect to see real growth become negative for a time while inflation starts to undershoot central bank targets. That normally means contraction of economic activity (aka a recession). What matters for capital markets is the depth and pace of the downswing. The increased uncertainty heightens the likelihood that banks, investors and other intermediaries in the financial system respond to rising risks and uncertainty by pulling their liquidity prematurely. This in itself creates the downswing in both markets and economies (of course, if it happens, no bank or investor would say they were premature).

This therefore constitutes the point of greatest danger for a policy error by central banks. Indeed, because we start from such elevated inflation levels, there is a lot more uncertainty about where we are in this trajectory. But despite most central bank policymakers reiterating that rates will remain restrictive, investors now think the tail risks of higher rates and therefore a policy error have diminished. Whether it’s the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the discussions are acknowledging that rate rises are almost certainly over for now and that cuts are on the cards.

This week brings the release of provisional inflation data, which feels even more important in the current environment. UK consumer prices rises are expected to have fallen back to 4.7% year-on-year, which should allow Prime Minister Rishi Sunak to claim a victory in his inflation pledge (to halve inflation from December 2022’s +10.5%). That will be less important than the signal it might send about the chances of rate cuts in the second half of 2024.

Bank of England giving and receiving mixed messages

When the BoE kept interest rates on hold last week, Governor Andrew Bailey told reporters it was too early to talk about cutting rates. But last Tuesday, BoE chief economist and fellow Monetary Policy Committee (MPC) member Huw Pill was quoted saying market expectations of an interest rate cut next year are not “unreasonable”. Bailey and Pill are realistically outlining the same view on the economy, but tone can make a world of difference to avid central bank watchers. In fairness to the MPC though, if their policy guidance is confusing, it is probably because the UK economy appears rather fickle – with  growth oscillating from slight positive to slight negative, while prices continue to rise.

Markets tend to dislike the uncertainty of mixed messages but rather like the prospect of easier monetary policy. However, the labour market situation is more complicated than it appears. The MPC’s estimates of how jobs might respond to their policies are hampered by the fact that the reliability of the available data has become less than ideal for making that call. For the headline unemployment rate published by the Office for National Statistics (ONS), this is well known, since it only comes out after a significant delay and so offers at best an indication of how things were five or six months ago. But the household, company and tax data used for the more up to date job market assessment has since the pandemic also become far less reliable than it used to be.

UK year-on-year inflation is still high in both absolute and relative terms, so it makes sense for Bailey to silence any dovish noises, but of course the Governor has had to bear the brunt of the public’s ire over the cost-of-living crisis. No doubt, his speeches will continue to insist that the BoE decisions are dependent on incoming data. The problem is that being dependent on the data from the main official sources means “behind the curve”. We think they will not be so hidebound.

Europe’s natural gas on a bumpy road down

European gas supplies officially reached 100% of storage capacity at the beginning of November. This is a far cry from the fears of last year, when Russia’s war in Ukraine decimated Europe’s energy supplies and policymakers planned for rolling blackouts. Policy choices have obviously played a big part. The immediate priority was finding other short-term sources, exemplified by the massive increase in imports of liquified natural gas (LNG), but structural changes for the medium and long term have been aggressively pursued too. Strict storage build targets are part of it, helped by moves to limit household and business energy consumption – particularly in Germany – thanks in part to an unusually mild winter. Less remarked on has been the increase in storage capacity itself, although this slow process has not yet had a massive impact at the aggregate supply level.

The biggest structural push, over the longer term at least, has been to ween Europe off natural gas altogether. But even if the EU’s long-term energy security and environmental ambitions both point towards renewables, politicians are well aware that gas will be needed for the foreseeable future. Pipelines to alternative suppliers are being built, and there has been a marked increase in LNG inflows. Recognition of this need is perhaps why wholesale gas prices have not fallen further. Reserves were still above a reassuring 60% of capacity at the start of spring – the seasonal low point for reserves – and the build has been ahead of schedule ever since, but European gas and energy prices are still high by historical levels. This is despite weak demand on the continent, both current and projected.

Even with abundant supplies, the technologies for transporting or using them are not very flexible. This is fine if we can plan for periods of supply-demand imbalance, but the last few years have shown that the best laid plans go awry. For example, even with gas supplies filling up all available tanks, Europe is estimated to have at most two months of required gas for the winter. Two months spare should be more than enough, but further complications could always come about. The brittle nature of energy markets means that prices will likely remain volatility, even if the general trend is downward.

Still, a slow downward path will be good for European businesses and households. But unfortunately, this improvement in absolute terms is unlikely to give much benefit in relative terms. For one thing, the current oversupply is largely down to weak economic demand – hardly a good sign for the near future.

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

13/11/2023

Please see the below article from Evelyn Partners for their thoughts on the UK Q3 2023 GDP announcement:

What happened?

UK real gross domestic product (GDP) neither grew nor contracted in the third quarter with the headline quarter-on-quarter (QoQ) GDP growth rate estimated at 0.0% for Q3. This was better than had been expected by the median estimate among economists, of a 0.1% contraction. However, the growth picture was weaker than in the second quarter of 2023, when the economy expanded by a modest 0.2% QoQ.

What does it mean?

The UK economy managed to dodge a contraction in the third quarter, just edging out the 0.1% contraction that has been forecasted by economists, to instead show no growth for the quarter. This was driven by September’s monthly growth data which at 0.2%, was ahead of the expected flat growth forecast for the month. This means the UK economy is not yet teetering on the verge of a technical recession, which is defined as two consecutive quarters of negative GDP growth. On a year-on-year basis the UK economy has expanded by 0.6% over the last 12 months.

Despite a strong start to the first half of the year, consumption has now started to wane, with the sector contributing -0.2 percentage points to the QoQ real GDP figure. Within this, retail sales contracted by near 1% QoQ with consumer facing services contracting by a more pronounced 3%. Higher interest rates have likely weighed on discretionary spending over the summer, prompting a deterioration in consumer confidence. Further evidence of higher rates filtering through into the real economy could be seen from residential investment which fell 1.7% QoQ marking its fourth consecutive quarterly decline.

Government spending also weighed negatively on the quarterly growth rate, contributing -0.1 percentage points. Real government consumption expenditure fell by 0.5% in the third quarter following an increase of 2.5% in the previous quarter. The fall in government consumption in the latest quarter mainly reflects lower spending on health and on education, which fell by 1.4% and 0.3%, respectively.

A bright spot came from net trade, which contributed 0.4 percentage points to the QoQ rate. Export volumes increased by 0.5% in the third quarter, following a fall of 0.9% in the second quarter. The increase was driven by a 2.8% rise in services exports, which offset a fall of 2.0% in goods exports. Import volumes fell by 0.8% in the third quarter. This decline was driven by a 3.5% fall in goods imports, which offset a 4.2% increase in services imports.

Similarly, inventories remained a positive contributor to the headline figure, as it has now for four consecutive quarters, adding 0.2 percentage points to the QoQ growth figure.

Looking ahead:

The lagged impacts of tight monetary policy are beginning to impact the UK economy, as the cost of capital increase, households will experience a reduction in disposable incomes as aggregate mortgage payments tick up. However, as the labour market remains tight with unemployment at near recent lows and wage growth remaining elevated, this should act as a partial buffer for any downside potential on consumption heading into Q4 and into next year.

Although the BoE have seemingly paused on interest rates with markets pricing in only a ~20% chance of one more hike over the next three meetings, it does not mean rate cuts are on the immediate horizon. However, BoE chief economist Huw Pill recently hinted at rate cuts materialising sooner than participants expected. With the economic growth picture deteriorating and inflation starting to come under control it could prompt the BoE to cut rates as soon as Mid 2024.

Bottom Line

With the UK economy managing to avoid contraction in the third quarter the risks of an imminent technical recession have been delayed for now. However, as the impact of higher interest rates continue to put the brakes on consumption, the resulting drag on the real economy could lead to negative economic growth in the coming quarters which might prompt the BoE to cut rates sooner than expected.

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Andrew Lloyd DipPFS

10/11/2023