Blogs

Please see below, an article from Brewin Dolphin which summarises the latest news impacting global investment markets. Received last night – 24/09/2024

Last week was a central bank week for September, with the Federal Reserve (the “Fed”), the Bank of England (BoE) and the Bank of Japan (BoJ) all setting rates as the week wore on.

There were few surprises with the Fed cutting rates, and the BoE and the BoJ remaining on hold. The nuance was in the size of the moves, detail of any forecasts and the tone of the commentary.

Powell goes large

The Fed cut rates by 0.5%, which was technically a surprise. Less than 10% of respondents to Bloomberg’s poll expected such a large cut.

Why was this? Well, September’s jobs report was mixed, and since then, the inflation data had been marginally hot.

The Fed doesn’t hold speeches during the week and a half before its meeting and the market wasn’t prepared for a 0.5% cut. But you may recall from our update a couple of weeks ago, that our sense was that conditions justified a 0.5% cut, given there’s now evidence to support the Fed’s assertion that interest rates are restrictive.

Therefore, there was an opportunity for the Fed to take a meaningful step towards reducing the restrictiveness of rates, and to do so without suggesting that the economy is in dire trouble or implying that we can expect a series of sharp interest rate cuts from here on.

In fact, Fed Chairman Jerome Powell made these points explicitly when he referenced the weak tone of the ‘Beige Book1 ’ (which we discussed a few weeks ago). He said that “nobody should look at 50 basis points and say this is the new pace”.

How has the decision landed?

Powell’s message has been received. The market has now gone from expecting a quarter point in September and a half point in November, to getting a half point in September and only expecting a quarter point in November. Beyond that, there’s been very little change in interest rate expectations. However, longer-term bond yields are actually a little bit higher than they were prior to the announcement.

This shows that the Fed’s stance hasn’t changed very much, despite the significant change in rates. Its rough assessment of long-term interest rates (communicated through the so-called ‘dot plot’) spans a range from 2.4% to around 3.8%. This suggests rates will be coming down over the coming months, but it’s hard to know exactly how much they’ll fall.

Equities sold off on the day of the announcement. Were investors disappointed? Not really. Where there’s so much anticipation around a data release, we often see volatility over the next day or so as an elaborate dance of position taking and profit taking takes place.

Is the U.S. economy sliding into recession?

The consumer activity slowdown that took place in July and August was tangible and although it was first flagged by consumer-facing companies, it eventually became evident in the economic data. But the current tone of companies suggests that activity levels have stabilised, and no longer continue to slide. The latest example came from the payment companies at some of the conferences held a couple of weeks ago – Goldman Sachs held a technology conference and Barclays held a financial services conference. The overall message is that consumer spending is also very consistent.

What about the UK?

In the UK, last week saw the BoE keep interest rates unchanged. It did so off the back of the latest inflation data, which was pretty uneventful. So, is inflation under control in the UK?

The consumer price index (CPI) recently declined to the BoE’s target rate but has been picking back up a little, while CPI including owner occupier’s housing costs (CPIH), which is arguably a fairer measure of inflation because it includes housing costs, is still running around 3%. Forward indicators of housing costs suggest that spread should narrow, but the main issue remains whether services inflation and wages slow.

Like the Fed, the BoE will want to do enough to restrain economic activity without completely strangling the economy. A sign they might be winning that battle was the decline in median inflation, which suggests that, aside from the very volatile anomalies, general price growth has started to slow.

Meanwhile, retail sales data released on Friday morning painted a picture of consumer strength. A significant element of this will be driven by the catch-up spending of consumers stuck indoors by the dreadful weather in May and June. However, a backdrop of tax cuts, rising benefits, a rising national living wage and increasing pay settlements will also be helping on the spending front.

A slight concern is the consumer sentiment survey from market research company GfK, which was released on Friday morning. This suggests there has been quite a sharp slowdown in confidence among shoppers. So far, this is not corroborated by other sources but it’s worth monitoring. The last month, in particular, has seen a lot of briefing and speculation around possible budget changes, none of which paint a particularly upbeat picture. However, clothing retailer Next reported that consumer activity is very stable at the moment, which struck a similar tone to the American payment companies.

Please continue to check our blog content for the latest advice and planning updates from leading investment firms.

Alex Kitteringham

25^th September 2024

Please see the below article from EPIC Investment Partners detailing their thoughts on China’s recent ploys in an attempt to stimulate their economy. Received this morning 24/09/2024.

In a bold move to revitalise its flagging economy, China unveiled a sweeping package of stimulus measures. People’s Bank of China (PBoC) Governor Pan Gongsheng, in an unusual public briefing this morning, announced a series of decisive actions aimed at boosting growth and combating deflationary pressures.

Pan revealed plans to reduce the reserve requirement ratio (RRR) for banks by 50bps in the near term, with the possibility of a further 25-50bps of cuts by year-end. The PBoC will also lower the 7-day repo rate by 0.20% to 1.50% and hinted at a potential 0.20-0.25% reduction in the loan prime rate. The RRR cut alone will inject CNY 1tn of liquidity into the banking system.

The troubled property sector received particular attention. The PBoC lowered mortgage down payments for second homes to 15% from 25%, easing previous restrictions. Furthermore, Pan outlined plans to extend existing support measures for the sector by two years and reduce interest rates on current mortgages.

To shore up the stock market, policymakers announced a CNY 500bn fund to support brokers, insurance companies, and funds in purchasing stocks. An additional CNY 300bn will aid companies in conducting share buybacks.

The stimulus package sent ripples through global markets, with China’s CSI 300 index surging 4.3% – its best performance since July 2020. Hong Kong’s Hang Seng index rose 4%, while European markets also rallied. China’s 10-year government bond yield hit a record low of 2% during Pan’s address.

Markets interpreted these measures positively, particularly as they were announced in tandem. However, disappointment lingered over the lack of fiscal stimulus, suggesting the PBoC may be struggling to convince the central government to implement a larger fiscal deficit.

The timing of the announcement is noteworthy, coming shortly after the US Fed’s interest rate cut, which narrowed the differential between US and Chinese rates, giving the PBoC more room to manoeuvre.

As China grapples with a prolonged property sector slowdown, weak consumer sentiment, and persistent deflationary forces, all eyes are on Beijing to see if this stimulus salvo can reignite the world’s second-largest economy. While the effectiveness of these measures remains to be seen, China is clearly taking key steps to regain economic momentum.

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

Alex Clare

24/09/2024.

Please see the below article from Tatton Investment Management detailing their thoughts on markets over the past week, received this morning:

Central bank pivot 2.0

The US Federal Reserve’s 50 basis point interest rate cut was last week’s biggest story, and markets took it well. It was portrayed as a surprisingly large cut, but markets had already priced in a high chance of a big cut. Markets also predicted the Bank of England holding rates steady, but are now confident of a November cut to UK rates. The trajectory is down on both sides of the Atlantic – but the implied pace of cuts is notably quicker in the US.

That might seem strange, given the US’ continued outperformance. But US wage inflation is now falling quicker than elsewhere, and Fed chair Powell said the 50bps cut was a ‘catch up’ – making up for not cutting last time – rather than an omen. Markets agreed, and are again confident that the Fed has pulled off a ‘soft landing’ (lower rates without recession). We doubt that the decline in rates will be as quick or as smooth as markets are currently predicting, though. True the Fed is more worried than other central banks about unemployment, but recent data has been better and rate cuts (both actual and expected) will themselves support the economy. Lower mortgage rates are already encouraging builders, for example.

Markets seem as overconfident about rate cuts as they were for ‘Pivot 1.0’ last year. Bond yields could therefore rise from here. While that could hamper stock valuation metrics, it should also mean higher profit growth – not a bad balance for risk assets.

Less positive was the People’s Bank of China (PBoC) unexpectedly holding rates high, despite clear economic weakness. Markets thought a big Fed cut would give the PBoC room to loosen policy, but it is keeping financial conditions incredibly tight – with historically weak money supply growth. Beijing clearly has a tightening bias and is willing to let domestic demand suffer in response. That means China will keep exporting disinflation – which is good for keeping global inflation down, but bad for supporting global growth. We will have to watch China’s policy developments closely, given its fraught political history.

Oil fragmentation and its impact on Saudi Arabia

Saudi Arabia is the world’s biggest oil exporter and the de facto head of the OPEC price cartel, but market fragmentation is challenging its global dominance. The creation of OPEC+ (with 10 additional nations including Russia) strengthened the bloc’s ability to manage global prices, but the US has now become the world’s largest oil producer, and there is increased competition from non-traditional producers like Brazil, Angola and Nigeria.

Sanctions on Russia and Iran have also redirected – rather than removed – oil flows. China is now a critical market for Saudi oil (the Kingdom accounts for 15% of China’s oil imports) but its economy is weak and it increasingly buys discounted Russian or Iranian oil.

The world needs to transition away from oil over the long-term, which is why Saudi Arabia is pursuing an ambitious economic restructuring plan called Vision 2030 – with investments estimated to be worth $1.25tn. But the plan’s success depends on current oil revenues, which are under pressure. The IMF estimates that Saudi Arabia needs $96.20 per barrel to breakeven with fiscal expenses, well above the current price.

If the Kingdom pressured OPEC+ to collectively cut production or tries to regain market share by flooding supply at lower prices – as it has done in the past – that would worsen its fiscal deficit and endanger its long-term structural investments. A global growth rebound would help, but the US economy is slowing and Chinese demand has been weak for a long time. Saudi Arabia’s two biggest challenges pull it in opposite directions: market fragmentation calls for oversupply to regain market share; the green transition calls for undersupply to inflate current prices. Fiscal challenges might force the Kingdom to increase supply regardless.

Insight: Yield Curve Un-invertigo

The US yield curve is a plot of government bond yields across different maturities. Finance people call it ‘normal’ when it slopes upwards – since bond holders generally want higher fixed interest if fixing their coupon income over the longer-term – and ‘inverted’ when short-term yields are higher than long-term. A common definition calls it inverted when 2-year treasury yields are higher than 10-year yields, and on that basis it was inverted from July 2022 until the start of September. Since then, it has “un-inverted”.

This is significant because an inverted yield curve is an historically reliable recession predictor – since it suggests returns (i.e. growth) will be lower in the future. But un-inversion unfortunately doesn’t indicate no recession. For starters, the common 10-2 definition is rather arbitrary, and the yield curve is still inverted if you use 3-month yields as a starting point rather than 2-years. Moreover, the yield curve often un-inverts (on the 10-2 definition) just before a recession. That’s why some analysts have sounded the alarm over the recent un-inversion (along with some employment-based recession indicators).

We don’t think a US recession is imminent, however. There are well-known problems with using the yield curve as an indicator at the moment – mostly centred around the distorting effects of central banks’ bond-buying (and now selling) programmes. The yield curve certainly tells us that short-term interest rates will fall sharply in the next two years, but that itself should support growth. It’s a sign that investors expect a ‘soft landing’ (rates falling and growth re-accelerating without a recession in between). But the yield curve’s relatively shallow incline (past two years) also suggests a lack of confidence in long-term growth. This fits with what a host of indicators are telling us, and it points to decent – but perhaps underwhelming – returns in the months ahead.

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

Andrew Lloyd

23/09/2024

Please see the below update from Evelyn Partners, received this afternoon – 19/09/2024.

September Bank of England MPC decision

What happened?

Coming hot on the heels of Federal Reserve’s sizeable 50 basis point cut overnight, the Bank of England (BoE) held their base rate at 5.00% at their meeting today. This was consistent with market expectations (57/58 economists surveyed by Bloomberg) following the first 25 basis points (bps) cut this easing cycle in August.

The vote was split 8-1 with Swati Dhingra, the anticipated sole dissident, expressing a preference to ease another 25bps to 4.75%.

What does it mean?

While developed market central banks have begun a coordinated cutting cycle, volatility in rate expectations in the US over the past week stands in contrast to the ‘steady as she goes’ developments in the UK.  This highlights differences in the health and dynamics of Western economies, as well as the mandates of the banks themselves.

Recent data in the UK reflected an unattractive combination of weaker than expected GDP growth and sticky inflation – with core CPI at 3.6% and services at 5.6%.  A new line in the policy statement said, “in the absence of material developments, a gradual approach to removing policy restraint remains appropriate” and was taken by the market as relatively hawkish.

Bottom Line

The BoE held interest rates at 5.00%.  As per their previous rhetoric, we expected them to continue to emphasise their data dependence meeting-by-meeting but acknowledge and flag that markets are pricing a 25bps cut in for their next November meeting. 

September Federal Open Market Committee policy decision

What happened?

The Federal Open Market Committee voted to cut rates by 50bps to 5.0% (upper bound) at the conclusion of their meeting yesterday. There was little doubt that the Fed would cut rates, but whether they would go for a ‘regular’ size 25bps or the ‘large’ 50bps was the subject of much speculation. The decision to make the larger cut was not unanimous, with one member casting a dissenting vote in favour of the smaller cut, the first time this has happened since 2005. This cut marks the end of keeping rates on hold, which lasted 8 consecutive meetings since the last increase in July 2023.

What does it mean?

The Fed’s move is larger than many forecasters had anticipated – 62% of the 1400 market professionals surveyed today by Deutsche Bank thought that the Fed would only cut by 25bps. This contradicting the futures market which adjusted this week to suggest the larger cut was more likely, following articles in the financial press suggesting the decision was closer than markets were then anticipating.

Fed chair Jay Powell said in the news conference today that the “US economy is in a good place and our decision today is designed to keep it there”. The statement revealed some concern over the labour market, changing language around job gains from ‘moderated’ to ‘slowed’, alongside repetition of their recognition that unemployment was creeping up although remained low.

The risks to the larger cut are that there is less pressure on inflation to move back towards the 2% target – the most recent datapoint for PCE, the Fed’s preferred measure was 2.5% on an annualised basis. Yesterday’s statement said that the ‘Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals continue to move into better are roughly in balance’

Despite this larger initial move, messaging from the Fed did little to move the likely path of interest rates according to the futures market, which expects rates to fall to around 2.9% by the end of 2025. This still stand below the Feds newly published DOTS plot estimate of 3.4% by the same point. The plot also revealed an expectation for lower rates thereafter, reducing from just above 3% to just below 3% by the end of 2026. Powell said in the conference that rates are not on a “preset” path, and that the pace of cuts could change with the inflation and jobs market data.

Although yesterday’s larger move was not fully anticipated by the futures markets, there was little sign of panic in prices following the announcement. The yield on two-year government bonds (a proxy for the direction of monetary policy) fell 10bps on the announcement but regained its prior level later. US Equities were volatile, gaining initially before falling back to the end the session slightly lower.

Bottom Line

The Fed made a larger start than many expected to their first easing cycle since the pandemic. The effect of monetary policy on the real economy is subject to long and variable lags which are hard to know in advance and change from one cycle to the next.  We still think the ‘soft landing’ is the most likely outcome for the US economy and expect the rate cutting cycle will continue to aid a rotation in the equity market, away from the dominant mega-cap stocks who will earn less on their cash piles and towards recently unloved areas of the market such as small caps who will benefit from cheaper borrowing costs on their floating rate financing.

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

Charlotte Clarke

19/09/2024

Please see below, an article from Evelyn Partners detailing the latest UK CPI Inflation figures and their thoughts on how this data may impact future policy decisions. Received this morning – 18/09/2024

What happened?

UK August annual headline CPI inflation came in at 2.2% (consensus: 2.2%), versus 2.2% in July. In monthly terms, CPI was 0.3% (consensus: 0.3%), compared to -0.2% in July. Core CPI inflation (ex-energy, food, alcohol and tobacco) came in at 3.6% (consensus: 3.5%) vs 3.3% in July.

What does it mean?

Although the core measure surprised on the upside in August, the broad downward trend in lower UK CPI inflation is intact. This should encourage the Bank of England (BoE) to cut interest rates over the coming quarters.

However, given that services CPI inflation remains elevated at 5.6% year-over-year and economic growth has picked-up in the first half of 2024, the BoE will probably take a cautious approach in loosening unless there is significant belt tightening coming after the budget on 30 October that dampens growth expectations.

Looking at it relatively, the futures markets point to a more rapid pace of rate cuts coming out of the US than in the UK. By June 2025, the market expects the Fed base rate to be 3.0%, compared to 3.5% for the BoE, when the current rates are 5.5% (upper bound) and 5.0%, respectively.

Higher relative rates in the UK are likely to play out through sterling appreciation against the US dollar. Other major currencies (i.e. the euro and yen) could also make gains against the US dollar as the Fed becomes dovish.

The bottom line here is that a weaker dollar indicates that there is greater supply of US dollars floating around the financial system compared to demand. On balance, this is favourable for equities, as investors seek a home to park their money. 

Another beneficiary from US dollar weakness is gold bullion. As the greenback falls in value, the US dollar-denominated gold price becomes cheaper to non-dollar investors, and this creates demand.

Moreover, the gold price is supported by secular foreign central bank bullion purchases. This follows Western financial sanctions against Russia after its invasion of Ukraine: most notably the freezing of Russia’s overseas assets, including its holdings of US government debt. Such action may encourage other major holders of US treasuries, like China and Saudi Arabia, to recycle less of their trade surpluses into foreign bonds over fears that these assets could be seized in the future. Considering this risk, central banks outside Western financial systems will increasingly view gold – which can be held physically within national borders – as an alternative to government bonds, creating a new structural demand driver for bullion.

Bottom Line

The broader trend of lower UK inflation should encourage the BoE to cut interest rates this year, but at a relatively slower pace compared to the US. Potentially, this should provide upside for the sterling exchange rate against the US dollar. Gold will continue to benefit from broad-based weakening in the greenback and secular bullion demand from central banks in emerging economies. Gold also provides some diversification qualities in portfolios to boot.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

18^th September 2024

Please see below, Brewin Dolphin’s Markets in a Minute, providing a concise analysis of the latest trends in global markets and the key economic news from around the world. Received late last night – 17/09/2024

Markets generally staged a bit of a recovery last week. Most major markets were positive for the week but were still off their highs for the year.

Trump and Harris face off

The most anticipated news last week was the debate between presidential hopefuls Kamala Harris and Donald Trump. The debate was typically feisty but showed the Democrats have learnt some lessons in how to debate Trump. They largely dispensed with Hilary Clinton’s approach of trying to be policy-focussed. Instead, Harris managed to needle Trump on the size of his rallies.

It was hardly a magisterial performance from the vice president, but the consensus seems to be that even if she didn’t win the debate, former President Trump seemed to lose it. This debate’s enduring soundbite? Trump’s rant about unsubstantiated stories of immigrants eating pets.

Prediction markets have given Harris a slight edge since the debate, arresting a slide in her odds after the initial burst of momentum she enjoyed in the weeks surrounding the launch of her candidacy.

Over the last two weeks, markets have tended to follow the movements in the most likely winner of the election. They fell as Trump’s chances rose ahead of the debate, and they have rallied as Trump’s chances have ebbed in the aftermath. Does this mean the market is anxious about the prospect of a second Trump term?

That’s probably not the right conclusion to draw. Not least because in the preceding weeks, markets seemed more positively correlated with Trump’s chances. More importantly, it’s unclear exactly which candidate the market would be happier with.

Over the weekend, there was a second assassination attempt on Trump. While he declared he is safe and well, it adds to a sense of chaos and raises questions about his security protection. The market impact is unclear, though this time the assassination attempt has not immediately boosted his probability of winning the election according to betting odds, unlike the first attempt. Investors will continue to focus on policy proposals and economic developments in the run up to the election.

Who are investors backing?

From an investor’s perspective, the key dividing line between either a Trump or Harris presidency is corporation tax rates. Trump would like to cut the corporate income tax rate from 21% to 15%, whereas Harris would like to increase it to 28%.

Taken on its own, therefore, this clearly makes Trump seem the preferred candidate from an investment perspective. However, there are caveats.

The first caveat is Trump’s use of broad global tariffs and particularly harsh Chinese tariffs. These will be inflationary and, when they are inevitably met with retaliatory measures, they will also impede growth.

Furthermore, we shouldn’t just assume that because a victorious candidate has made a tax pledge it will inevitably become law. According to the U.S. Constitution, all finance bills must be proposed in the House of Representatives. They pass through several steps within the House of Representatives and the Senate before a finalised bill is sent to the president’s desk where they will either sign it into law or veto it. So, the president’s role (in theory), is actually pretty modest in shaping policy.

Trump campaigned on the basis he’d reduce corporate income tax to 15% during his first campaign in 2016, but the subsequent Tax Cuts and Jobs Act of 2017, which reduced the tax to 21%, was essentially authored by Kevin Brady (the Chairman of the House Ways & Means Committee).

The question is, then, if the 2017 House of Representatives wasn’t prepared to cut tax rates as much as Trump wanted, will the 2025 one be prepared to?

It’s only likely if the Republicans win the House of Representatives, which is touch and go. Then it would also need to be approved by the Senate, which Republicans are likely to win from the Democrats. Only a clean sweep of the presidency, House of Representatives and the Senate will enable the Republicans to pursue a tax cutting agenda. It’s also unclear how aggressively they would do so given the U.S. is already running a 6% budget deficit and government debt to GDP is on course to exceed 10% during the coming Congress.

What is clear, is that there are several hurdles which need to be cleared to reap the anticipated benefits of a Trump presidency; the market-unfriendly tariffs and the general unpredictability he brings are more of a foregone conclusion.

The most obvious downside of Harris winning the presidency, the risk of an increase in corporate income tax, seems a vague risk given it’s very unlikely the Democrats would control both the House of Representatives and Congress.

Beyond these measures, Trump is likely to be a less stringent enforcer of regulation than Harris, which shareholders would certainly appreciate.

U.S. inflation data surprises

The main economic news from last week centred on U.S. inflation data coming in a little stronger than had been anticipated. Generally, investors saw this as tilting the Federal Reserve’s (the “Fed”) bias in favour of a more modest 0.25% cut when they announce their policy this week, rather than the more extreme 0.5%.

The main reason for the surprise was shelter inflation, but it does seem like rents will contribute less in future periods, so the Fed need not be too concerned.

There was also a slightly higher measure of core services inflation (excluding housing). This measure, known as supercore, would be more concerning for the Fed as it’s the kind of inflation that central banks aim to control by retraining and stimulating the economy. The context here though, is that supercore had been very weak for the last three months, perhaps sustainably so, and therefore a little rebound shouldn’t be troubling.

Moreover, the general employment and consumption data has tilted weak in recent months, so there doesn’t appear to be a problem with excessive demand. Another validation of this comes from some of the alternative measures of the consumer price index (CPI) – trimmed mean and median, for example – which generally eased during August.

It’s all in the data…

Overall, the market seemed settled on a quarter point interest rate cut as the Fed entered the pre-meeting blackout period. It will have retail sales numbers to digest this week, and I still wouldn’t discount the chances of a 0.5% cut. Policy is currently tight, and on balance, data being released over the last few weeks has suggested that high interest rates are at last starting to bite.

Indeed, the European Central Bank did cut interest rates last Thursday and in the accompanying commentary, President Christine Lagarde was keen to emphasise the bank is data dependent. As we’ve previously discussed in the weekly round-up, it’s very difficult for central bankers to take steps which don’t seem justified by current economic data.

So this week we’ll have monetary policy being set by the Fed, the Bank of England and the Bank of Japan, of which the Fed is considered the only bank likely to change policy.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

18^th September 2024

Please see the below article from EPIC Investment Partners detailing important information on what we can expect in the upcoming week. Received this morning 16/09/2024.

The main event this week is expected to be the FOMC meeting (Tue-Wed), where the start of the easing cycle is forecast to begin. Other central bank meetings include the BoE (Thu) and BoJ (Fri). Later today we have UK house prices and US empire manufacturing data prints later today. Tuesday’s main event will be the US retail sales figures, earlier we have Germany ZEW expectations. Eurozone and UK CPI, and US housing starts feature on Wednesday. The BoE meets on Thursday, markets will look for any indications on the QT strategy. Japan CPI and the BoJ’s rate decision and future rhetoric will keep markets busy on Friday morning. 

Central bank chatter includes the ECB’s Panetta and Nahel on Monday. Vujcic and Holzmann speak at a conference on Wednesday. Knot and Schnabel follow on Wednesday at separate events. On Friday we will hear from Lagarde as she delivers the IMF’s Michel Camdessus Central Bank Lecture. 

Markets witnessed mixed sentiment last week, as they digested US CPI and PPI data, and jobs reports. The yield on the US 10-year rallied 6bps to a new year-low of 3.65%, and the S&P Index rebounded +4.02%. Meanwhile, the dollar closed marginally lower, and oil rose 0.77%, to $71.61pb.

The US CPI report, the final one before next week’s FOMC meeting, gave markets plenty to consider. Both headline and core CPI matched expectations year-over-year at 2.5% and 3.2%, respectively. However, the slight uptick in August’s core CPI, combined with stronger real average earnings—hourly earnings up 1.3% YoY (previously 0.7%) and weekly earnings up 0.9% YoY (from 0.4%)— tempered market expectations for a rate cut this week. Next, August’s PPI data revealed a slower-than-anticipated annual growth in producer inflation, the headline print rose 1.7% YoY (est. 1.8%, prev. 2.1%). Core producer inflation, excluding volatile food and energy prices, also increased at a steady but slower rate of 2.4%, falling short of the 2.5% forecast. This deceleration in factory gate prices typically indicates weakening consumer spending, which has historically led to speculation about potential interest rate cuts by the Fed. Markets closed the week pricing in a 25bps cut this week and anticipate at least four rate cuts this year.

The ECB reduced interest rates for the second time this year, lowering the key deposit rate by 25bps to 3.5%, in line with expectations. President Lagarde emphasised a data-dependent approach, stating that future rate decisions are not predetermined. The ECB maintained its inflation projections for 2024-2026, expecting a decline towards the 2% target by 2025, despite anticipating a temporary rise in inflation later this year. Growth forecasts for 2024 were revised downward to 0.8%, reflecting weaker domestic demand. The ECB also decreased rates on main refinancing operations and marginal lending facilities to 3.65% and 3.90%, respectively. The broader message was that whilst acknowledging downside risks to economic growth, the ECB aims to moderate monetary policy restrictions whilst remaining vigilant about inflation trends. On Friday, the central bank’s President Lagarde said the ECB could cut again in October if the economy suffers a major setback.  

Elsewhere, China’s economy is currently grappling with a complex set of challenges and opportunities. Recent data highlights a persistent imbalance between robust external demand and lacklustre domestic consumption. This disparity has begun to affect both households and businesses, casting doubt on the nation’s ability to achieve its ambitious 5% annual growth target. While exports, particularly to the EU, have shown encouraging growth, internal economic indicators paint a more sobering picture. Credit expansion has slowed markedly, as evidenced by the widening gap between M2 and M1 money supply growth. Retail sales, released over the weekend, have decelerated amidst rising unemployment, and fixed asset investment has waned, primarily due to a downturn in infrastructure spending. Nevertheless, there are glimmers of hope. The equipment manufacturing sector has emerged as a stabilising force, and government initiatives such as the ‘trade-in’ policy are yielding positive results. Moreover, accelerated government bond issuance is expected to bolster infrastructure projects in the coming months. Intriguingly, despite increased bond supply, yields on Chinese government bonds have continued to decline, with long-term rates reaching new lows for the year. This complex economic landscape underscores the delicate balancing act facing Chinese policymakers as they navigate the path to sustainable growth.

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

Alex Clare

16/09/2024

Please see the below article from Tatton Investment Management detailing their thoughts on markets over the past week, received this morning:

Market fears fading

Global stocks recovered well last week, in a sign that the early September jitters are fading. The European Central Bank (ECB) cut interest rates again – though president Lagarde warned that the path down isn’t guaranteed. This was interpreted as a hawkish signal, and markets’ implied European rate expectations flattened somewhat. The decision came just after a former advisory board member argued in the FT that the “ECB has no room to cut rates”. They pointed to sticky services inflation, and Eurozone rates being two percentage points below the US. But Europe’s economy clearly needs support, as highlighted by former ECB president Mario Draghi’s call for a “new industrial strategy”. 

By contrast, the US Federal Reserve’s clear dovishness is supporting US markets. Stocks were boosted by inflation data, which showed domestic demand staying strong. This probably would have unnerved markets a few months ago – suggesting persistent inflation and possibly delayed rate cuts – but investors are now happy about US resilience. This was matched by a general sense of fears dissipating, including a rebound for Nvidia. The US presidential debate didn’t move markets in either direction, but that too is a sign that investors are confident enough about the economy.

So, attention turns to the Fed’s meeting this week, with the bank expected to deliver a 25 basis point cut. A bigger cut would probably be interpreted negatively, as the Fed lacking confidence in the US economy. Ultimately, the trajectory and pace of rate changes matter more than the magnitude of individual cuts – and the Fed has been clear it wants to be supportive. This stance perplexes some, considering US economic strength and, hence, relatively smaller need for policy support. But, inflation and employment are more delicate than they seem, and there are pockets of the economy which are struggling from high rates (as shown in problems at Ally Financial). 

We therefore expect the Fed to cut. There could be volatility if officials deviate from these expectations.

Budget and growth gloom make UK rate cut certain

Chancellor Rachel Reeves has warned of “difficult decisions on tax, on spending, and on welfare,” at the 30 October budget. Investors are worried this might mean changes to capital gains tax (CGT) or pension relief. We have said for months that CGT will probably rise, but shouldn’t affect the value of UK investments too much. Pension changes could be more significant, as these have more direct economic impacts.

Unfortunately, recent UK data matches the government’s gloom. Growth was flat in July and manufacturers are struggling – despite apparently positive sentiment surveys over the summer. Annual inflation was below expectations, and prices fell month-on-month. Unemployment fell, but youth unemployment rose to its highest since the pandemic. Britain seems to be in a similar phase to the decade after the global financial crisis: low unemployment and low inflation – but sluggish growth.

Markets therefore expect the Bank of England to cut rates by 25 basis points in November. BoE hawks warned about a ‘wage-price spiral’ as recently as August, but payroll data is weaker than in the US – where the central bank is now worried about a deteriorating labour market. The hawks will likely back down, and the BoE could cut rates by more if the Labour government enacts the austerity it alludes to.

Previously strong business sentiment – particularly among housebuilders – might have been pumped up by the new government’s honeymoon period. Now that it’s over, we’re seeing weaker data, but much of it is backwards looking. The steeper path for rate cuts into 2025 should help, supporting mortgage owners. It is too early to tell whether the green shoots of a few months ago will bear fruit, but recent signs are less than ideal. The outlook is not all dreary, but summer chirping is certainly over.

How China trades

Chinese exports were surprisingly strong in August. This suggests Chinese producers are rushing out inventory, ahead of a potential second term for Donald Trump, and the increased tariffs that would bring. US-China trade has been hampered since Trump first came in, and last year Mexico officially replaced China as the US’ largest trading partner. 

Often underappreciated is the fact that the US is not China’s biggest trading bloc either, though. EU-China trade was worth more in 2023, and ASEAN (comprised of 10 southeast Asian nations) is China’s largest trading partner by far. This is in part fallout from the US trade wars, but it could dampen the impact of any new tariffs. If so, Beijing has to think about its trade policies differently. It kept its currency stable against the dollar for most of 2024, for example, despite domestic weakness. That effectively meant tighter Chinese financial conditions and less competitive exports. 

Total trade isn’t the whole story, though. The US accounts for China’s largest trade surplus (meaning capital flows from the US to China) and Washington’s tariffs tend to influence other tariff regimes around the world (the EU has since introduced a levy on Chinese electric cars, for example). If Trump entered the White House again, he could also do indirect damage to China by putting tariffs on other countries. Much of China’s exports to ASEAN, India and Mexico are intermediate goods which are re-exported to the US, for example.

China wants to shift its economy to become domestic demand led, but this process has stalled in the last few years and consumption is weak. A weak export outlook is another hurdle, and Chinese exporters seem resigned to a gradually worsening tariff environment. We expect Beijing to maintain a diplomatic dialogue, but impose occasional countermeasures as they pursue a long-term trade realignment.

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

Andrew Lloyd

16/09/2024