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Please see below, Brooks Macdonald’s Daily Investment Bulletin which provides a brief analysis of the latest news from global investment markets. Received today – 12/09/2024

What has happened?

The focus for investors yesterday was the latest US consumer inflation figures. Aside a still-stubborn and widely perceived lag in US shelter rental inflation, the data was otherwise broadly consistent with a narrative of inflation continuing to fall, albeit gradually, towards the US Federal Reserve’s 2% inflation target, but equally not signalling recession worries either. While markets appeared initially downbeat on the data, equity indices were later moved up by a rally in US mega cap US technology shares which drove the overall market higher. Those tech moves were led by generative Artificial Intelligence chip play Nvidia, which finished the day up +8.15% in US dollar terms, its strongest day’s performance since July.

About that US CPI data

The latest US Consumer Price Index (CPI) data landed yesterday. A glance at the year-on-year numbers suggested a good set of data, with headline all-items CPI falling to +2.5% in August, a touch better than the +2.6% expected, down from July’s +2.9% and the lowest print since February 2021. That headline fall was boosted by the ongoing weakness in the oil price which as a reminder got to under US$70 per Brent barrel earlier this week, its lowest levels since last December, though it saw a bounce yesterday. As for the core (excluding energy and food) CPI, that was inline at +3.2% year on year. However, the shorter-term trend shows the stubbornness of shelter rent inflation, which contributed to leave core CPI up by +0.28% month-on-month between July and August, the most in four months, and running at a one-month annualised rate of +3.4%.

European Central bank cut expected

Later today, at 1.15pm UK time, we get the outcome from the European Central Bank (ECB)’s latest monetary policy meeting. According to a Bloomberg survey, all 68 economists surveyed have nailed on a 0.25% cut later today, which if that is the outcome, would take the ECB deposit interest rate down to 3.5%, from 3.75% currently. For context, the ECB first cut rates back in June, but then paused in July. After today, the debate appears to be around the path ahead, and will-they-won’t-they cut again in the next couple of meetings later this year (in October and December). By way of reference, the latest (flash) Euro Area annual core CPI inflation rate in August was running at 2.8%, the lowest in four months.

What does Brooks Macdonald think?

We can most likely ignore the shelter rent-driven impact in yesterday’s US core CPI inflation data. Given the way that rent inflation is calculated (looking at all leases rather than just new leases), it is a lagging indicator. Instead, looking at more current measures of rental inflation such as US real-estate sites Apartment List and Zillow show a different story. In their national rent indices, these private measures of annual rent inflation are lower than they were immediately prior to the pandemic in 2020, and in the case of Apartment List, annual rent inflation is actually running negative. All in all, yesterday’s US inflation data looks benign-enough for the Fed to probably ignore it and continue to focus on the jobs side of its dual mandate. As for the markets, with the inflation data there or thereabouts versus expectations and not worryingly weaker, the flipside is that the data has reduced the chances for an outsized 0.50% cut from the Fed next week, with expectations now coalescing around a smaller 0.25% cut instead.

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

Alex Kitteringham

12^th September 2024

Please see this week’s Markets in a Minute update below from Brewin Dolphin, received yesterday afternoon – 10/09/2024.

Guy Foster, Chief Strategist, discusses the two points of pressure for investors: the strength of the U.S. economy and uncertainty over the outlook for semiconductor sales. Plus, Janet Mui, Head of Market Analysis, analyses fresh U.S. jobs data.

Last week was a back-to-school week for markets, and generally, risk assets slipped slightly. There was a little panic over the summer as consumer activity weakened. Some even speculated that the Federal Reserve (the “Fed”) would impose an emergency interest rate cut ahead of its next scheduled meeting.

Did a break on the beach settle the nerves or incubate the anxiety of your average investor? Last week provided some answers.

Nvidia under the spotlight

A couple of weeks ago, we discussed how investors were underwhelmed by Nvidia’s extraordinarily strong earnings. Last week, they had to contend with the U.S. Department of Justice (DOJ) sending subpoenas to Nvidia and other companies, as it seeks evidence the chipmaker violated antitrust laws.

It was known that the DOJ had been investigating the dominant provider of artificial intelligence (AI) processors, but this was an unexpected escalation, which caused volatility globally across several stocks operating within the chip-making ecosystem.

While the outcome of the investigation is obviously a concern for investors, the volatility likely reflects their anxiety about the broader issues surrounding the AI processor boom. Although these companies are making enormous sales at the moment, it’s uncertain how long the current surge in sales will last, and to what level they’ll revert when the cycle slows.

U.S. consumer woes

The second major anxiety for investors relates to the strength of the U.S. economy. We’ve talked in recent weeks about how the consumer sector has been holding up, with retailers in particular citing a change in behaviour, whereby consumers buy less or trade down to cheaper brands.

Last week, Goldman Sachs held its Global Retailing Conference, and the message remained broadly the same. The discount store chain Dollar Tree painted a peculiarly graphic picture of its average customer – a low-income family also holding a second job, where those additional hours seem to have gone away or be on the wane.

So, consumer-facing companies have reported some weakness, which seemed at odds with some of the economic data.

Last week, we saw a bit more evidence these companies’ experience is broadly shared. The Fed produces a report called the Beige Book. It’s similar to the Bank of England’s Agents’ report – a summary of anecdotal interviews with key business contacts, which contrasts with the statistical data investors spend time trying to interpret. This showed economic activity growing slightly in just three (out of eight) districts. It told of employers generally maintaining employment but cutting labour costs by reducing extra hours or not replacing job leavers. The tone was downbeat but not alarming, and there was a large regional variation.

We also learnt the number of job openings declined (again). It remains high, but less abnormally so. Last week’s purchasing managers indices showed the U.S. manufacturing sector was contracting.

Friday saw the final and most anticipated piece of the puzzle, the U.S. employment (nonfarm payroll) report. Like much other data last week, headline jobs growth was weak. It also included negative revisions to previously reported data, which perhaps helps explain why companies seemed to report weakening activity levels before they were evident in the economic statistics.

Putting these data together, the case seems compelling for a double (half percentage point) interest rate cut when the Fed meets in a week’s time. As it stands, the market’s only expecting a single cut because Fed speakers have not yet prepared investors for anything more drastic. Some fear a more drastic cut could unsettle the markets, but the Fed has asserted for months that policy is very restrictive.

As such we’ve discussed how the Fed needed inflation data to turn before it could justify a cut. Now the data finally supports its assertion, it seems entirely plausible it should want to reduce that degree of restrictiveness significantly.

Not all bad news

The data doesn’t mean there’s reason to panic. This perhaps explains the market’s initial response to these figures, which was an increase in futures, suggesting investors think this bad news could be treated as good news.

Sadly, the positive sentiment didn’t last, and the U.S. equity market ended the week well down. This decline was led by economically sensitive consumer stocks, but technology also underperformed as the market digested Broadcom’s results, which didn’t see revenue guidance upgraded.

Soft-landing hopes remain intact because although jobs growth was weaker than expected, when coupled with decent earnings growth, it underpins that growth still looks good for the current quarter. And even though the manufacturing sector purchasing managers index (PMI) may be experiencing a recession of sorts, the much more significant services sector PMI was pretty strong.

That wasn’t just a U.S. phenomenon. In Europe, the Eurozone and UK both saw robust expansion in services sector activity. There were weaknesses though, with Germany remaining a weak spot within Europe.

The European Central Bank may cut rates again this week, particularly as it had some good news on the inflation front; the measure of compensation per employee, which it uses as a gold standard measure of wage inflation, slowed further in the second quarter.

In the UK, the economic news continued to be strong as the economy rides on the waves of tax cuts and wage increases. Therefore, the Bank of England can probably afford to leave rates unchanged when it meets next week.

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

11/09/2024

Please see below yesterday’s daily update article from EPIC Investment Partners:

The US presidential debate (Tue), US CPI (Wed), US PPI (Thu), and potential ECB cut (Thu) will garner market interest this week. Later today Apple launches its iPhone 16 along with other tech. China trade data kick starts Tuesday, and later we have Germany CPI and UK unemployment prints. US CPI takes centre stage on Wednesday given it is the last inflation figure before the Fed’s next meeting. Currently, markets expect headline CPI to have eased to 2.6% yoy, with the core reading stagnant at 3.2% yoy. US PPI follows on Thursday. Markets will monitor PPI components such as airfares and financial services components which feed into the Fed’s preferred inflation gauge, the PCE deflator. The week ends with the preliminary Uni. of Michigan consumer sentiment prints for September. 

Last week’s broader risk-off sentiment supported bonds amid generally softer data from the US. The yield on the 10-year UST rallied 19bps to 3.71% by Friday’s close. The S&P Index suffered a 4.25% loss driven by slowdown fears. The DXY Index fell 0.51%. Meanwhile, Brent slipped 9.82% to $71.02pb amid demand concerns. 

The US ISM manufacturing reading remained in contraction, and fell below expectations in August. However, this was stronger than the July print. Next JOLTS job openings and the ADP employment change both disappointed. Then Friday’s non farm payrolls indicated a more pronounced slowdown in the labour market than expected. Job gains reached only +142K, considerably lower than the market forecast of +165. Additionally, previous reports were revised downwards, with last month’s already weak figure of +114k adjusted even further to a mere +89k. On the other hand, the unemployment rate fell to 4.2%, in line with market expectations, and average hourly earnings ticked up to 3.8% yoy. While the disappointing job growth in isolation might suggest a 50bp cut, the steady unemployment rate coupled with still strong wage growth could prompt the Fed to opt for a more modest 25bp reduction. It presents a challenging balancing act for the central bank, weighing the recent weakening jobs data against the upside inflation pressures. 

A downbeat August Fed Beige Book noted that while “employment levels were generally flat to up slightly in recent weeks,” it also stated that “employers were more selective with their hires and less likely to expand their workforces” due to heightened concerns over demand and the economic outlook. The report also noted that “manufacturing activity declined in most districts”. We also heard from several Fed members including Goolsbee who stated: “it is pretty clear that the path is not just rate cuts soon” but multiple cuts over the next 12 months. On Friday, Williams stated that “it is now appropriate to dial down the degree of restrictiveness” amid a more evenly balanced economy. Over the weekend, US Treasury Secretary Yellen maintained that while there are risks, recent cooling in the labour market is a signal of a soft landing, not a recession. 

Elsewhere, China’s PPI and CPI disappointed this morning, reading -1.8% yoy, and +0.6% yoy in August, respectively. The marginal tick-up in CPI was due to higher food costs resulting from weather disruptions, rather than a pick-up in domestic demand. Over the weekend, the nation’s FX reserves topped USD 3.28tn. Meanwhile, the domestic real estate market faces uncertainty as current easing measures are deemed inadequate, with speculation about potential government intervention or local inaction. Financial markets reflect this uncertainty, with government bond yields dropping and discussions about monetary policy adjustments evident. The People’s Bank of China (PBoC) has indicated room for reserve requirement ratio (RRR) cuts and emphasised data-dependent interest rate decisions. Markets will look for any stimulus indications from policy makers at China’s People’s Congress committee meetings. The One Belt and Road initiative summit will also be of interest this week.  

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 DipPFS

10/09/2024

Please see this week’s Markets in a Minute update from Brewin Dolphin providing a brief update on the key factors currently affecting global investment markets. Received last night:

Last week was supposed to be all about Nvidia’s earnings results, which took place just after the U.S. market closed on Wednesday.

Many analysts described the release as one of the most important corporate results in history, even perceived by some as more influential than last week’s speech by Federal Reserve (the “Fed”) Chair Jay Powell at the Jackson Hole Economic Symposium.

In the end, was it worth the hype? Yes and no.

Unpicking the poster child

Nvidia is the poster child of the artificial intelligence (AI) revolution and a direct beneficiary of the billions of dollars of investment into AI infrastructure. Its stock has added nearly $3trn in market value over the two years since ChatGPT captured the imagination of the public. At one point, it surpassed Apple and Microsoft to be the stock with the biggest market capitalisation in the U.S. equity market.

Given Nvidia’s weight of almost 7% in the S&P 500 index, big moves either way directly impact the index, and it has the potential to make or break the current market rally.

Nvidia’s outlook guidance will also offer a read-across for other semiconductor companies on AI spending, and act as a barometer for the AI investment theme that’s lifted the share prices of mega-cap technology companies. It was indeed a very consequential earnings report.

In the end, Nvidia continued its string of positive earnings surprises compared to analysts’ average estimates:

• Second quarter revenue was a record $26.3bn, up 16% from the previous quarter and up 154% from a year ago.
• Third quarter revenue is projected to be $32.5bn, plus or minus 2%.
• Gross margin came in at 75.1%, though this was a decrease from the 78.4% seen in the previous quarter.
• Nvidia also announced a $50bn share buyback.

These results are hard to fault and continue to demonstrate the insatiable demand for Nvidia’s cuttingedge chips, systems and services.

Everything’s rosy, right?

Well, Nvidia’s stock price fell over 6% on the next trading day. The problem is that its investors have grown accustomed to blowout earnings in the previous quarters. For instance, in the period ending July 2023, Nvidia’s reported revenue was a whopping 22% above estimates. In contrast, the latest quarter saw a much less impressive 4% earnings beat (earnings surpassing expectations), and a declining trend in the size of the earnings beat.

There are also concerns about supply chain and delay issues with the latest chip system (Blackwell), though Nvidia CEO Jensen Huang offered reassurances that supply will be abundant.

There tends to be lot of noise around quarterly earnings, but the longer-term AI investment thesis remains intact in our view. Nvidia’s CUDA software has led to a critical mass of developers within its ecosystem, which makes switching Markets in a Minute | 2 supplier difficult. This, combined with a short product innovation cycle, helps it stay well ahead of competitors (hence defending its 75%+ gross margin). Its forward price/earnings ratio of 35x is not out of whack for such a strong, unique quality-growth compounder.

However, there are concerns around hyper-scalers (Nvidia’s key customers) developing their own chips. While Nvidia is likely to lose some market share in the AI chips space, the key thing is that the entire market is growing.

We acknowledge this is a very volatile stock and markets are quick to anticipate and price in any changes in outlook. So, how do you play it?

We think having diversified exposure via a basket of selected top semiconductor names (chip foundries, equipment makers, designers and software companies) across the supply chain is a good approach to access the semiconductor investment thesis.

How much impact do Nvidia’s earnings have on markets?

The answer to this trillion-dollar question is… not as much as people would’ve thought.

On the day Nvidia’s share prices slumped, five out of seven of the so called ‘Magnificent Seven’ stocks (Apple, Microsoft, Nvidia, Meta, Alphabet, Amazon and Tesla) were up. The S&P 500 index was flat, meaning the rest of the market ex-Nvidia rose on the day. The S&P 500 equal-weighted index and the Dow Jones Industrial Average index made new record highs.

Why is that?

As discussed above, Nvidia’s results were actually very strong. Perhaps not strong enough to support another leap up for Nvidia, but certainly strong enough to remove the uncertainty clouding AI-related investments and draw the curtain on another healthy corporate earnings season.

With Nvidia’s results out of the way, markets can firmly focus on the economic fundamentals and look forward to upcoming interest rate cuts by the Fed. Economic data out last week was music to the ears of investors and as goldilocks (not too hot, not too cold) as one can hope for.

U.S. consumers remain resilient

The upward revisions to the second quarter U.S. gross domestic product (GDP) data probably did heavy lifting in supporting the market post Nvidia’s earnings results. Usually, these GDP revisions data don’t spur much market attention or reaction, but as we know, traders are now in a phase of (unhealthy) obsession with any data related to U.S. consumers.

Second quarter U.S. GDP growth was revised up from 2.8% to 3.0% (quarter-on-quarter, annualised), and it was driven by a meaningful upward revision to personal spending from 2.3% to 2.9%. This suggests U.S. consumers remained resilient, and helped ease recession concerns.

Now, the usual argument is that GDP data is lagging given that second quarter results cover up to June. But the latest weekly initial jobless claims offered support to the soft-landing thesis, as first-time unemployment claims have trended lower in the past few weeks. Additionally, personal consumption and income data continued to expand in July.

It’s hard to square the recent data with a narrative of a U.S. economy about to fall off a cliff. The goldilocks element is that U.S. inflation is moving in the right direction. July’s core personal consumption expenditure price index, the Fed’s preferred measure of underlying inflation, came below estimates on a year-on-year basis, while the 0.2% monthly advance is consistent with the Fed’s 2% inflation target. These economic fundamentals have supported a sharp rebound in global equities, a retreat in bond yields and a deprecation in the U.S. dollar index.

It seems that, finally, we have confidently reached the point where inflation is no longer the biggest concern to markets and central bankers. Aside from the U.S., there’s good news on the inflation front in key major economies such as the UK and the Eurozone.

UK and Eurozone inflation is normalising

In the UK, the British Retail Consortium shop price index fell 0.3% year-on-year, its first contraction since October 2021. Inflation has come a long way to normalise from the Covid supply chain squeeze and the energy price surge of the past three years. While this is a data point the Bank of England will appreciate, it’s not enough for another rate cut in September.

In the Eurozone, inflation slowed from 2.6% to 2.2% in August. Inflation in Germany, the largest economy in the area, has reached the 2% milestone. Markets cheered as the normalisation back to 2% inflation is finally in sight after a long battle by the European Central Bank (ECB) to fight inflation that was as high as 10.7% around two years ago.

With the normalisation of inflation, there is a strong case for monetary policy to return to less restrictive levels. For the Eurozone, the icing on the cake is that wage growth has slowed markedly in the second quarter. This is an indicator the ECB focuses on, so this further builds the case for another rate cut in September, which markets have now fully priced in.

All in all, the backdrop of easing monetary policy, ongoing economic expansion, and healthy corporate earnings are reasons for optimism for risk assets going forward.

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

Andrew Lloyd

4^th September 2024

Please see below the Daily Investment Bulletin from Brooks Macdonald, received on 03/09/2024:

What has happened

A quiet start to the week was pretty much a given yesterday as US markets were closed on Monday for the US Labour Day holiday. With the US closed, there was less direction for investors in global equity markets. As a case in point, the pan-European STOXX600 equity index was practically flat yesterday, recording a marginal fall of just -0.02% in local currency terms, but still close to its latest record closing high it set at the end of last week. Overnight, Asian equity markets have also been trading in a fairly narrow range.

Euro area economic survey data

Euro area final manufacturing Purchasing Manager Index (PMI) data for August was out yesterday. Overall, there were upward revisions from the preliminary first-read data, with the Euro Area final print at 45.8 (slightly better than the preliminary reading of 45.6). That said, it was still below the 50-separation mark between month-on-month contraction versus expansion in broader economic activity. The flipside of the marginally better data is that it led markets to dial down very slightly the size of expected interest rates by December: by the close yesterday, investors were pricing in 61 basis points (bps) of cuts from the European Central Bank by year-end, down -1.8bps relative to the previous day.

US elections latest

In nine weeks’ time, we have the US elections to be held on Tuesday 5th November. The latest political poll surveys and forecast models are continuing to point to a very tight race. One projection from the company FiveThirtyEight is currently giving a 57% chance of victory to Democrat presidential candidate Kamala Harris, with 43% to her Republican rival Donald Trump. The polls are similarly tight, with company RealClearPolitics showing a polling average currently giving Harris a lead of 1.8 percent nationwide, but such a small lead is still inside the generally accepted margin of error of most polls.

What does Brooks Macdonald think

US voters arguably have two presidential candidates with pretty divergent policy ambitions. Democrat presidential candidate Harris is proposing selective price controls as well as tax increases on corporations, plus tax increases on high earners, in order to support low- and middle-income workers. By contrast, her Republican rival Trump is signalling tax cuts and deregulation in order to reduce costs for both consumers and businesses. As a result, in terms of the possible market impact, there could be some not insignificant relative different outcomes for investors to think about – that said, with such a tight political race currently, it is very hard to pre-emptively decisively factor either outcome into asset prices.

Bloomberg as at 03/09/2024. TR denotes Net Total Return.

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

03/09/2024