Blogs

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

To call it well flagged would be an understatement. Overnight, the Bank of Japan (BoJ) ended the world’s last negative rate policy, raising interest rates for the first time in 17 years. The central bank raised rates to the range of 0% to 0.1%, from -0.1%, after acknowledging its long-held goal of 2% inflation was within sight. The bank will also scrap its yield curve control (YCC) policy, along with purchases of exchange traded funds and Japan real estate investment trusts (J-REITS). However, it will continue buying long-end JGB’s at “broadly the same amount” as before.  

As we mentioned in Friday’s Daily Update, it was reported that the BoJ’s decision hinged on the outcome of the yearly wage negotiations by Japan’s largest union, Rengo. Japan’s largest companies agreed to hike wages by 5.28% for 2024, the largest increase in 33 years, and 3.5% above the average of the last 20 years.  

In the statement released after the decision, the BoJ said: “Services prices have continued to increase moderately, partly due to the moderate wage increases seen thus far”. “As these recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has become more solid, the Bank judged it came in sight that the prices stability target would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 outlook report,” the central bank added. 

In the post-meeting news conference BoJ Governor Kazuo Ueda comments were balanced. Ueda admitted that the stronger-than-expected wage growth had played a large role in the decision. He reiterated that the price target was within sight and that the upward economic cycle has been confirmed by recent data releases. However, he expects the BoJ to remain accommodative until the underlying inflation eventually reaches 2%, whilst not taking the option of future hikes off the table. 

Talking of inflation, one person whose prices have sky-rocketed over the last year is the tooth fairy. According to a report in the WSJ, it appears that if the tooth fairy leaves your little ones a pound under their pillow for their teeth, they are entitled to feel hard done by.  

In 2023, the average payout for a lost tooth in the US was at a record high of $6.23, a 20% increase from 2022. However, that’s not the half of it. The report also states some of the jaw-dropping items some children get for losing their teeth. This includes silver fairy necklaces, Louis Vuitton bracelets, even brand-new iPhones!

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

Charlotte Clarke

19/03/2024

Please see today’s Daily Investment Bulletin from Brooks Macdonald:

What has happened

Yesterday, we saw small pullbacks in the market with the S&P 500 slightly retreating by 0.19% from its record peak, while the yields on 10-year Treasuries edged up for the third consecutive day. Tech sector underperformed, as NASDAQ lost 0.54% and the ‘Magnificent 7’ group fell 0.74%. These movements reflect growing concerns about the sustainability of the recent market rally, particularly considering the S&P 500’s sharp rise of over 25% in less than 100 trading sessions. Additionally, inflation remains a key point of focus, with the US CPI release casting doubt on the Federal Reserve’s ability to implement rate cuts by June.

PPI and retail sales preview

Today’s spotlight will continue to shine on inflation with the release of the US Producer Price Index (PPI) and retail sales data. The PPI is particularly significant as it includes several components that contribute to the Personal Consumption Expenditures (PCE) inflation measure, which the Federal Reserve targets. Although the PCE data will not be available until the end of March, today’s PPI figures will provide a clearer indication of what to expect. Meanwhile, the retail sales report is not anticipated to significantly alter the broader narrative of consumer resilience, despite some recent indications of a cooling labour market that could signal a deceleration in consumption growth.

What does Brooks Macdonald think

Although the tech sector underperformed yesterday, it is still the biggest driver of recent market momentum. Tuesday’s gains in the stock market, post-CPI release, were propelled by tech companies such as Nvidia and Oracle, which reported earnings that surpassed expectations, and Wednesday’s modest pullback was again led by the tech industry. Notably, Tesla’s shares dropped by 4.54%, making it the poorest performer in the S&P 500 year-to-date with a 31.8% decline, surpassing Boeing’s downturn. This increasing divergence within the tech mega-caps is certainly one to watch as it could affect overall investors’ sentiment and the scope of broadening of the current equity market rally.

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

14/03/2024

Please see the below article from Blackfinch Investment LTD providing a brief analysis of the key factors currently affecting global markets and economies. Received yesterday.

UK

Chancellor of the Exchequer, Jeremy Hunt, delivered a Spring Budget that received a muted market reaction. The key takeaway for households was that the main rate of Class 1 employee National Insurance Contributions would be reduced from 10% to 8% from 6th April. This was in addition to the 2p cut announced at the 2023 Autumn Statement 2023 which came into effect from 6th January.

Hunt also announced the introduction of a new Individual Savings Account (ISA) and British Savings Bonds. The UK ISA will give savers an extra £5,000 tax-free allowance on top of the existing £20,000 ISA allowance, to encourage investment into UK-focused assets.

The latest House Price Index from Halifax reported that UK house prices increased 0.4% in February, the fifth monthly rise in a row. Property prices were 1.7% higher on an annual basis, a slowdown from the 2.3% increase in the 12 months to January. An average UK home now costs £291,699, around £1,000 more than last month.

Housebuilding, which has been contracting in recent months, saw its biggest turnaround since January. The Purchasing Managers’ Index (PMI) jumped to 49.8, up from the previous month’s 44.2, reflecting the recent boost in sentiment that interest rate cuts are coming this year.

The S&P Global UK composite PMI, which tracks activity at services companies and manufacturers, increased from 52.9 in January to 53.0 in February. This indicated a pick-up in growth, after service sector companies reported a sustained increase in business activity, with the fastest rise in new work since May 2023.

North America

Recent US economic data boosted expectations that the Federal Reserve could begin cutting rates sooner than expected, with concern of a ‘hot’ jobs market beginning to dissipate. The US unemployment rate rose to 3.9%, the highest since January 2022, against expectations of staying at 3.7%. In terms of wage growth, average hourly earnings rose 0.1% in February from January, less than the 0.3% growth forecast by economists. Finally, the US Labor Department reported the US economy added 275k jobs in February, more than the expected 200k.

Europe

The European Central Bank (ECB) left its key interest rate at 4.50% after its latest policy meeting. Importantly, its latest staff projections show inflation forecasts has been revised down to an average 2.3% in 2024 and 2.0% in 2025. These forecasts has raised hopes that borrowing costs could come down sooner than thought.

Turkey’s consumer price index (CPI) increased by 67.07% annually in February, up from 64.9% in January, showing prices rising even faster than expected. On a monthly basis, prices rose by 4.53% in February. The Turkish central bank maintained interest rates at 45%, pausing a hiking cycle that had lifted borrowing costs by 3,650 basis points since May 2023. A year ago, rates were down at 8.5%, before a series of hikes to cool inflation.

The final Eurozone Gross Domestic Product (GDP) estimate confirmed the economy stagnated in Q4, barely improving on the 0.1% contraction seen in Q3. A historical data revision meant overall GDP growth came in at 0.4% last year, 0.1% lower than previously thought.

German factory orders plunged 11.3% month-on-month in January following an upwardly-revised 12% rise in December 2023. While the wild swings were attributed to volatility in big-ticket orders, core orders shrank 2.1% over the month. Core investment and consumer goods orders contracted over the month, as the impact of past rate hikes dampened consumer demand and the elevated uncertainty derailed investment.

Asia

According to the revised estimates, Japanese GDP grew 0.1% quarter-on-quarter in the fourth quarter of 2023, instead of a 0.1% dip in the initial estimate, reflecting an upgrade in business investment.

India became the fourth largest stock market in the world with a market capitalisation of INR 390trn (over USD 4.6trn) at the end of February, following five consecutive years of growth. The bull run reflects the combination of strong domestic and foreign buying.

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

12/03/2024

Please see below, Tatton Investment Management’s ‘Monday Digest’ providing a brief analysis of the key factors currently affecting global markets and economies. Received this morning – 11/03/2024

At least currency markets noticed the budget

Markets gained again last week, with the S&P 500 hitting another all-time high. But thanks to sterling gaining 1.5% against the US dollar, our table shows negative index returns. Sterling strength may be partly about Jeremy Hunt’s budget, despite the chancellor not giving away so much in the way of fiscal handouts. 

The national insurance cut could boost growth, while the freezing of fuel duties will not. The extra ISA allowance seemed more about show; more of a sop than a solution to Britain’s obvious domestic investment problems. Even these small offerings were enough to send our currency higher, though, with foreign investors becoming more optimistic on sterling assets. The outperformance of UK small cap versus large cap was encouraging too.

Rishi Sunak is unlikely to remain Prime Minister for long, but foreign investors are predicting a relatively smooth transition to a new centrist government, and the budget bolstered those perceptions. Mortgage holders will thank him for not raising borrowing costs. So too will the Labour Party, as it means they will more likely be able to borrow to invest.

The euro also rose, thanks to the European Central Bank (ECB) leaving interest rates unchanged. The ECB will likely cut by the summer, but President Lagarde seems reluctant to be the first developed market central banker to cut. Federal Reserve chair Jay Powell was similarly mildly hawkish in his testimony to US congress, but investors think a cut is at hand. 

Data released on Friday suggests 275,000 US jobs were added in February. That is extremely strong, but the initial data is suspect, as shown by downward revisions to December and January’s initial estimates. Citi Research’s economic surprise indicator shows US economy data is now undershooting economists’ expectations. UK data is starting to beat lowered forecasts while Europe is increasingly beating economist expectations – a great benefit to European equity markets and currency. 

What stands out the most, though, is falling volatility across markets – back to or below pre-pandemic levels in most cases. This tends to go in hand with higher equity valuations, as we are seeing now. High valuations also mean that the market has priced in strong future growth. It may be difficult to get more optimistic so that may mean only mild capital gains. We are likely to see more weeks with small gains but little drama.

Tight might soon feel tighter

Balance sheet adjustments – buying or selling assets – are one of the key ways the Federal Reserve (Fed) manages liquidity in the financial system. One of the most impressive things about the Fed’s post-pandemic quantitative tightening (QT – the selling of bonds and mortgage-backed securities) is that it has gotten so little attention. The infamous ‘taper tantrum’ of 2013 caused upsets in markets – and that was just a suggestion that the Fed might not buy as many bonds as it had, not the current outright balance sheet reduction. 

Reverse repo operations are one of the key tools the Fed has used to temper the effects of QT. In these, the Fed sells securities for cash now and, at the same time, buys them back at a future settlement date – thereby reducing the current cash in the system. They were crucial in the pandemic for draining excess liquidity that the Fed’s own QE had injected, which was causing short-term “congestion”. Reverse repos have been falling significantly for a while, and this reduction has counteracted the tightening effects of QT. The Fed has been tightening with one hand and loosening with another. 

That will likely change, though. The Fed hasn’t told us of any definite plans to taper QT (it is in the ‘talking about talking about it phase’) but the rate of change in reverse repos has already fallen and will level off more the closer operations get to zero. Continuing QT in this phase will probably mean that tight may feel tighter, making markets more volatile.

The key indicator is the gap between interbank lending and the Fed’s reserve rate on repo. When they come closer together it means liquidity levels are at equilibrium. 

The Fed could offset any short-term problems by adjusting repos or QT – but we suspect this could become a politically charged topic this election year. Donald Trump might again criticize the Fed for buying up government debt, so the FOMC will want to keep a low profile. But in a sense they might be damned if they do (through allegations of political interference) and damned if they don’t (through market volatility). This poses more risks to stock and credit valuations. QT hasn’t hurt markets yet, but it still can.

Returning M&A returns?

Mergers and acquisitions are trending up. Corporate deals are usually a sign of business confidence, so it makes sense this is happening when markets are buoyant. M&A activity fell dramatically over the last year, thanks to interest rate rises, but Morgan Stanley researchers think we will see a 50% rise this year compared to 2023. 

M&A deals need motive and financial opportunity. Activity was massive during the pandemic thanks to extraordinary liquidity, but dramatically shrank through rate rises. Rates are now expected to fall – but rate expectations don’t necessarily set current funding costs. Corporate balance sheets and credit spreads have improved, though, while rallying stock markets have helped companies get more capital. We can see this in Capital One’s all-share buyout of Discover Financial, for example. 

There is a huge amount of ‘dry powder’ – capital ready to be invested – held by businesses or private equity funds. Morgan Stanley estimates that global non-financial companies hold $5.6 trillion in cash, while private investors sit on $2.5tn. The US will probably see a lot of activity in private market deals, with less visible partial takeovers or ‘carve-outs’. Regional banks will need to consolidate too, and real estate is primed for M&A. 

Researchers also think Europe will lead the way in M&A activity after a relative drought, with consolidations among asset managers and tie ups between telecoms companies. Japan will likely rebound too, thanks to cyclical factors as well as long-term improvements in corporate governance. Globally, Morgan Stanley expects financials to see the most deals, while energy, health and technology could also stand out. 

M&A activity could catalyse a rotation from growth to value in markets, since the targets for M&A are usually always undervalued companies. Broadly it should mean more money going into stock markets, but the previous big winners will have less to gain.

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

Alex Kitteringham

11^th March 2024

Please see this week’s Markets in a Minute update from Brewin Dolphin, which was received yesterday evening:

Guy Foster, Chief Strategist, discusses recent economic growth data, while Janet Mui, Head of Market Analysis, analyses US inflation and consumer spending data.

The trend of the market reaching new highs continued at the end of February. The S&P 500 had already broken new ground but was joined by the NASDAQ, which surpassed its previous high seen at the end of 2021.

Japan has seen very strong index performance. Part of that has been aided by rapid yen depreciation. As a result, the Nikkei 225 also reached a new all-time high the week before last. But while the US markets are surpassing levels seen in 2021, the Nikkei is making a first all-time high since an extraordinary bubble in stocks and realestate at the end of the 1980s.

The Nikkei index is one of a few price-weighted indices (another being the Dow Jones in the US) where each company’s weight reflects how big its share price is rather than the relative size of the company. Japan’s more conventional TOPIX index remains well short of its late80’s high.

The FTSE 100 remains 4% off its record high, experienced early last year. Like many regions, the UK has underperformed the US recently, but the performance of indices exaggerates the extent. Overall, The UK market generates a dividend yield of 4% which is significantly driven by the energy sector.

Over the past couple of weeks, the stock market experienced fluctuations near record highs as traders awaited a barrage of economic data and remarks from Federal Reserve speakers on interest rates. The market absorbed heavy Treasury and corporate sales amidst month-end positioning, with US yields rising after government note auctions. Blue-chip companies sold a record amount of bonds in February to capitalise on investor demand amid lower borrowing costs.

The most obvious banana skin for the market overall was the US personal consumption expenditure (PCE) data. This ostensibly measures spending and feeds into gross domestic product (GDP). GDP is normally quoted in real terms, meaning it is adjusted for inflation. The Federal Reserve has typically preferred to measure consumer price changes through the PCE over the consumer prices index (CPI). PCE covers a broader range of goods and services, as well as a broader definition of consumers. The PCE process for changing the weightings of categories over time is perceived to be better, and its treatment of housing costs is more reflective of actual costs suffered by homeowners.

CPI, on the other hand, is released earlier during the month and certainly sounds more like the measures of inflation used in other regions (although some argue PCE is methodologically closer to other countries’ inflation calculations).

Perhaps the most critical difference between CPI and PCE in recent months is that core PCE, which excludes food and energy, has declined faster than core CPI, and thus paints a rosier picture of the consumer environment, which puts less pressure on policymakers to maintain high interest rates.

It was therefore a boon to investors to see the core PCE price index rising by just 2.8% over the twelve months to January (PCE data are released late relative to CPI). This is the slowest pace of price increases since March 2021. The data were taken positively by the market, seeming to justify hopes of lower interest rates later in the year. Afterall, real spending by consumers declined. But despite the slowdown in the annual rate of inflation, the monthly data were pretty strong, seeming more consistent with the CPI data from earlier in the month.

Gauging trends in inflation is difficult during January when a significant seasonal adjustment needs to be made. There were also a lot of one-off factors distorting consumer activity (such as weather), a strong month for dividend income, and a jump in cost-of-living adjustments for social security payments.

For now, markets expect to see interest rates declining as soon as June, but that will depend upon how policymakers interpret these data.

Federal Reserve speakers continued to influence market sentiment, with officials expressing readiness to lower rates if necessary. However, they emphasised the economy’s strength and the need for caution in policy adjustments.

Boston Federal Reserve president, Susan Collins, and New York’s John Williams, believe it will be appropriate to cut rates for the first time later this year, which is consistent with Raphael Bostic of the Atlanta Federal Reserve, who expects to cut this summer. Federal Reserve governor Michelle Bowman expects inflation to continue to decline further, with interest rates held at their current level — but said it’s too soon to begin rate cuts.

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

06/03/2024