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Please see below this weeks markets in a minute article from Brewin Dolphin, received late yesterday afternoon 16/01/2024.

Guy Foster, Chief Strategist, discusses the risks of escalating tensions in the Red Sea, while Janet Mui, Head of Market Analysis, analyses the latest US inflation figures.

As the second week of the year drew to a close, the contrast with 2023 remained tangible. The market seems to continue to see the glass half full, and even when confronted by some challenging technical and seasonal trends, the January blues are looking quite short-lived.

After losses in the first week, markets generally rallied in the second, and there was little in the way of news flow to point to as the drivers. At the end of the first week, US jobs growth was strong but with stronger wage growth than had been expected. So, the main theme of economic data at the beginning of 2024 was that recession risks were low, but with hints that inflationary pressures remain.

And that message continued into the second week. Again, it was a relatively quiet one from a news perspective, but the data continue to support the idea of an economy that is doing well with some lingering inflationary pressure.

Inflation persists

What were these data? The main news of last week was the US consumer price index (CPI) report and, jumping to the punchline, even though the report was stronger than expected, the markets showed little evidence of anxiety over the inflationary or interest rate outlook.

The headline rate of inflation was higher than expected but headline inflation tends to be dominated by food and energy prices. Energy prices have been weak but because they are volatile, it can be difficult to determine the extent to which movements in headline commodity prices translate into higher consumer prices from one month to the next. Furthermore, a rising oil price does not necessarily reflect robust domestic economic demand, and therefore would not necessarily prompt a response from the central bank (such as an increase in interest rates). So, attention naturally shifts to the core CPI measure, which strips food and energy prices out.

Core CPI was in line with expectations with prices rising 0.3% over the month. The bad news is that continued monthly increases at that pace would be exceeding the Federal Reserve’s inflation target, whereas increases of 0.2% would be consistent with that target. Fortunately, we can also assume that core CPI will come down in the future. Shelter is a large part of the index and rental inflation has been slowing. This strongly suggests that in the future, the rent of the shelter category will slow too.

This time it’s personal

In a sense it doesn’t matter, because the Fed does not base its policy decisions upon the CPI rate of inflation. Instead, it prefers the Personal Consumption Expenditure (PCE) Price Index. This number gets far less coverage than CPI, mainly because it comes out much later in the month, but what it lacks in timeliness it makes up for in relevance. With a lower weighting to rent and without the distortions of energy prices, and with a lower weighting to used vehicles, which were another temporary anomaly from the current month’s report, the core PCE is considered more accurate. Both are suggesting very similar annual rates of inflation at the moment, but the six-month annualised rate of core PCE price increases will likely drop to the Fed’s target of 2% when the data is eventually reported at the end of the month.

Were that to happen, the economy would enjoy the fabled Goldilocks scenario, which would be in play for the short term at least, as growth still seems ok. The weekly jobless claims data stubbornly refuse to rise, and the CPI data that we have just discussed gives an opportunity to estimate current consumer spending, which is the biggest driver of economic growth.

With the increase in employment, the increase in wages and notwithstanding the decline in hours worked, aggregate US consumer incomes increased by 7.8% over the last year – that is the fastest since January last year. This makes four months of consecutive improvement. Adjusting for inflation, real aggregate income growth has been 4.4%, so if employment remains robust and aggregate income expands faster than inflation, that should support economic growth and company earnings.

Earnings season We’ll find out over the coming days how companies faired during the last quarter as the US Q4 results season began in earnest on Friday. There will be plenty of headlines and statistics about the earnings season but in reality, it is difficult to draw many conclusions from the numbers posted in company results. Instead, it is what they say about the future that has more value. For instance, it seems likely that around 80% of companies will beat estimates, which sounds impressive until you realise this happens almost every earnings seasons. Typically, sell-side analysts at banks will forecast earnings and be overly optimistic. Over the course of a year, they will gradually reduce their estimates such that by the time the company reports, it beats reduced estimates.

Over most years, the aggregate market will see earnings undershoot estimates by around 6%. But that doesn’t necessarily matter as there have been plenty of years in which earnings have been poor in absolute terms, and disappointing relative to estimates (a year ahead). Investors have rightly been more focused on the future flow of potential profits from the company than any single year.

Banks got earnings season up and running on Friday. JP Morgan seems to have impressed while Citigroup and Bank of America underwhelmed.

Takeaways from management were encouraging. The Bank of America CFO said the bank thinks the soft landing is playing out. Jamie Dimon at JP Morgan was a little more circumspect, acknowledging that the economy continues to be resilient, and that consumers are still spending. He noted that markets are expecting a soft landing. But he highlights the size of the fiscal deficit and the pent-up impact of previous stimulus as reasons not to be too confident over current economic performance.

Rather than a Goldilocks scenario, Dimon emphasised that supply chains, the green transition, and healthcare would require higher levels of spending in the future, which could lead to higher inflation and interest rates. On the growth side, he warns of some of the uncertainties we noted in our annual preview; the economy is primed for recession with limited spare capacity but could easily avoid it with a fair wind. The problem would come if the economy was subject to economic shocks such as a spike in oil prices or disrupted supply chains.

On the Red Sea

On that note, of course, the other main news of last week saw an expansion of hostilities in the Red Sea. On Thursday, the US and UK intervened, with non-operational support from other Western nations, in military actions against Houthi rebels in Yemen. This is intended to prevent them from haranguing shipping en route to the Suez Canal. In advance of the attacks, the rebels warned there would be a response to them.

Since the attacks, they have continued targeting Israeli vessels. Iran has meanwhile condemned the attacks by the US and UK, and Saudi Arabia (which has been in conflict with the Houthis for almost a decade) expressed concern and pleaded for restraint. Oil and gold rose sharply on news of the intervention by the US and UK, although oil was sinking later in the session.

Traffic is still flowing through the Red Sea but at hugely inflated rates, reflecting the added risk to shippers. Meanwhile, many larger shippers have diverted around Southern Africa, which adds a further ten days and the requisite costs to the journey. These additional costs will be reflected in consumer prices at some stage, albeit goods prices are not the most influential category.

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

Charlotte Clarke

17/01/2024

Please see this week’s Tatton Monday Digest update received this morning:

Overview: a bumpy upwards path ahead

The equity market’s New Year malaise lasted no longer than usual. Last week, European equities recovered the previous week’s losses while US indices moved ahead smartly. However, softness in global banks hit the FTSE 100, as did a continued pullback in energy and materials sectors (that is, the more commodity-related companies). The standout performer was Japan, where investors appear convinced a corner has been turned. The Nikkei 225 broke the 35,000 level for the first time since 1990. Meanwhile, although issuance of new corporate bonds has slowed a little, corporate bonds as an asset class overall appeared to get a big infusion of investor capital. One can conclude from this that fears about a near-term recession have not just ebbed, they have effectively disappeared.

Against this backdrop of positivity, the risk for asset prices is unlikely to be about current earnings or their future growth. Nevertheless, in terms of upside, as we enter earnings season, companies will need to report lots of surprisingly positive Q4 earnings and solid outlooks in order for equity prices to rise substantially from here. Across the world, valuations (such as price-to-earnings ratios, even when using analyst expectations which include next year’s anticipated growth) are slightly expensive within the historical ranges, and they are expensive in the US.

The last few months point to rising investor confidence. Household/consumer and business confidence is showing early signs of turning upwards, and this positive combination augurs well for risk assets. The key question though, is whether positive growth will be gentle enough to keep prices stable and allow central banks to cut interest rates before the summer as markets have thus far anticipated. The next round of central bank meetings begins with the European Central Bank on Thursday 25 January, with the US Federal Reserve and Bank of England meetings scheduled for the following week. Given how much market fortunes have been tied to interest rate and yield levels over the past two years, yet again it is the central banks, and not so much the underlying economy, that will determine the direction of market travel over the coming quarter. Central bank watchers will be very busy over the next two weeks.

Has the disinflation trend come to an end?

Inflation expectations are key to the investment outlook for 2024. But there are already suggestions that markets may have gotten overexcited about the likelihood that inflation continues to decline at last year’s pace. Last week’s release of December’s consumer price index (CPI) numbers from both the US and Eurozone were higher than economist expectations. Eurozone inflation rose to 2.9% in December. However, inflation pressures were more apparent in the US, where the year-on-year overall CPI rate ticked up from 3.1% to 3.4% in December.

While we are sounding alarms about “transitory” dis-inflation, the further course of inflation is certainly something we will watch closely as we start the year. The early winter rally – and market excitement about disinflation – has set the scene for disappointment in at least some assets. Judging which ones is crucial for the year’s investment outlook. We can say two things with confidence. First, the recent valuation driven equity rally certainly makes stocks vulnerable to a short-term correction if there are inflationary signs. These might not come – and we have argued that China’s disinflationary impulse is a huge but often-ignored factor. But if they do, current valuations look vulnerable in the short-term – even if they are fair for the longer-term picture.

Second, the answer varies dramatically by region. The US market has been investors’ darling for years, and the Fed led the way in signalling rates easing this year. Europe, by contrast, has much lower equity valuations, even after recent outperformance. Core service inflation in Europe has also been surprisingly weak – particularly compared to the US. This side of the Atlantic, services look much more likely to pick up the disinflation slack.

India’s stalling reform progress

India is something of a fan favourite for UK investors, for multiple reasons. The world’s fifth-largest country economy is growing faster than any of those above it. It has strong economic and financial ties with developed nations – a particular draw for UK investors – but its financial and corporate structures still have plenty of room to improve. More recently, India’s stock market also benefitted from Emerging Market (EM) investors dramatically reallocating their capital away from the disappointing China. This led to a 20% jump in the Nifty 50, India’s headline equity index, in 2023. The index has doubled since the start of 2019.

India’s path in the last two decades has been remarkably similar to China’s between the 1990s and 2010s – a strengthening of corporate governance, opening up of asset markets and closer alignment with western-style international trade rules. This reform agenda has been at the heart of Prime Minister Narendra Modi’s two terms in office. Modi’s second term is set to end in a few months, with Indians going to the polls in the April-May general election. Even though his Bharatiya Janata party (BJP) is overwhelmingly expected to win, it would be hard, though not impossible, for the BJP to repeat or better their landslide 2019 performance. Modi remains popular even after nearly a decade in charge and some highly unpopular policies (like the initial reaction to demonetisation) – in large part thanks to improving economic conditions. But extending political gains this far into an administration is always a challenge. And for all the talk about Modi’s reform agenda (his allies promised a slew of labour law changes and privatisations within months of his second victory) his second term has been underwhelming. If the BJP loses seats, reforms will be harder to implement. On the reform basis alone, then, foreign investors have little to get excited about in 2024.

But India’s equity market success is also propelled by economic optimism – which is likely to carry on for the time being. Moreover, Indian assets are supported by production reallocation from China, whose risks are still very apparent. Whether those flows will continue later through the year is debatable. As we head into the election and beyond, investors might well re-evaluate their enthusiasm for India.

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

15/01/2024

Please see below, Brooks Macdonald’s ‘Daily Investment Bulletin’ providing a brief analysis of the key factors currently affecting global markets. Received this morning – 12/01/2024

What has happened?

Overnight the news that the US and UK have launched air strikes on Houthi rebels in Yemen is the main geopolitical story, however yesterday’s trading session was dominated by the US CPI release. US equity markets initially suffered after CPI came in above market expectations, however those losses were ultimately erased for the index to close only a few basis points lower.

 Houthi air strikes

 President Biden announced the strikes overnight saying that he would ‘not hesitate to direct further measures to protect our people and the free flow of international commerce as necessary.’ Oil prices rose as a result of this action and the market will also keep a close eye on container freight costs which will have inflationary impacts if they remain elevated.

 US CPI

 Starting with CPI, the monthly and annual headline CPI figures both surprised to the upside by 0.1%, meaning that the monthly figure expanded by 0.3%. For core CPI, the month-on-month expansion was also 0.3%, but that was in line with market expectations, although the year-on-year number fell less than hoped. The CPI readings were not disastrous for the soft landing narrative but continue to suggest that it will prove difficult to shift some of the stickier CPI subcomponents. In terms of those components, shelter is still running at 0.46% month-on-month which is important given its weight in the CPI basket. Interestingly, the PCE inflation measure, which the Fed officially targets, has a lower proportion allocated to shelter so may see less stickiness from this driver.

 What does Brooks Macdonald think?

 One of the logics behind the market rally later in the session was the realisation that if PCE continues to fall, despite CPI remaining sticky, this could give the US Federal Reserve the justification to cut interest rates should it want to. A surprising outcome from the day was the market’s expectations around a Fed interest rate cut by March which actually increased above a three-quarter percentage point probability. This occurred despite Fed speakers continuing to push back against such a certainty, with President Mester saying ‘I think March is probably too early in my estimate for a rate decline because I think we need to see some more evidence.’

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

12^th January 2024

Please see the below article from Evelyn Partners detailing their thoughts on the US CPI inflation announcement for December 2023. Received this afternoon 11/01/2024.

What happened?

US December annual headline CPI inflation rose at 3.4% (consensus +3.2%) and compares with +3.1% in November. On a monthly basis, CPI rose 0.3% (consensus +0.2%), compared to an increase of 0.1% in November.

Turning our attention to the core figure, which excludes volatile food and energy prices, the annual number came in at 3.9% (consensus 3.8%), compared to 4.0% in November.  In monthly terms, core CPI increased 0.3% (consensus 0.3%), which compares to 0.3% in November.

What does it mean?

December’s inflation report came in slightly above forecasters expectations with headline CPI re-accelerating slightly to 3.4%. However, core inflation continued to ease, falling below 4% for the first time since May 2024 with today’s figure of 3.9%.

The index for shelter continued its recent trend upwards rising by 0.5% on the month, shelter accounted for over half of the overall monthly inflation figure. However, on an annual basis shelter inflation has slowed to 6.2% from its peak of 8.2% in March 2023. Having decelerated dramatically during October and November the index for energy increased by 0.4% for the month of December, as increases in electricity and gasoline were large enough to offset the decrease from natural gas.

The faster than expected deceleration of inflation seen during the final quarter of 2023 has prompted money markets to start to anticipate rate cuts as early as March 2024. This change in market sentiment was provided some credibility by dovish communication from the Federal Open Market Committee (FOMC). Despite holding the base interest rate unchanged at 5.25-5.5% during their December meeting, the committee changed its forward guidance to signal it now expects to cut rates three times during 2024. This marks a considerable change in tone from the September meeting, when the committee did not expect to cut interest rates at all this year.

Despite Non-farm payrolls beating consensus estimates in December and the unemployment rate remaining low at 3.7%, wage growth appears to be normalising to levels consistent with 2% inflation over time. At the start of November, Federal Reserve (Fed) chair Powell stated that wage increases have come down significantly and are now “substantially closer to that level that would be consistent with 2% inflation over time”. On top of this, US productivity has been improving, with annualised Q3 productivity growth at 5.2%. So, despite annual wage growth remaining elevated at 4.1%, companies are still being rewarded by higher levels of output per unit labour cost. This should mitigate some of the inflationary pressures typically expected from heightened wage growth.

Immediately following the report bond yields rose with the US 10-year treasury note gaining ~7bps

Bottom Line

Despite today’s report showing in aggregate, limited new disinflationary progress, over recent months there have been three key macro trends that, in our view, have reduced the likelihood of a US economic hard landing. First, the labour market has started to soften without a notable step up in the unemployment rate. Second, wage growth is starting to moderate towards levels that would be consistent with the Fed’s 2% inflation target. Third, inflation has been decelerating faster than many forecasters had expected.

Money markets are currently pricing in rate cuts as early as March, in our view, that may be too soon, but if the labour market and inflation data softens further over the coming months, then we think US interest rates are likely to begin falling as we get towards the summer.

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

Alex Clare

11/01/2024

Please see below this week’s Weekly Market Commentary from Brooks Macdonald, received yesterday afternoon – 08/01/2024

In summary

• The US Equity Index posts its first weekly loss after nine weeks of consecutive gains
• The headline US employment report pointed to a robust labour market backdrop
• This week the market will focus on the US Consumer Price Index (CPI) report, released on Thursday 

Markets began 2024 in a downbeat mood with equities suffering as bond investors pushed back their expectations for US interest rate cuts based on the US Federal Reserve (Fed) commentary and strong economic data. The highest profile of these strong data points was the headline US employment report on Friday. This week the main event will likely be the US CPI report which is released, unusually, on Thursday.

The headline number of new jobs created in the US was 216,000 versus market expectations of just 160,000. With that stronger number, the overall unemployment rate remained steady at 3.7% compared to the consensus expectation of a rise to 3.8%. Lastly, the average hourly earnings was expected to slow to 0.3% however it actually still expanded by 0.4% month-on-month. Within the data there were some signs of a slowdown including the household survey which showed a loss of 686,000 jobs, the highest since April 2020. Last month that same survey saw a gain of 586,000 so clearly volatile, but one to keep an eye on. Later in the day, the US Institute of Supply Management (ISM) services survey pointed to a significant weakening in job prospects with the employment subcomponent back to levels last seen in 2020. The combination of the ISM survey and non-farm payroll report shows a mixed picture. However, markets latched onto the headline number of new jobs created, creating a sombre mood even if the US Equity Index did manage to post a very small gain by the end of the day.

Thursday will see the US CPI report released for December, with market expectations pointing to a headline 0.2% month-on-month gain and a 3.2% year-on-year gain. For the core CPI figures, the consensus expects 0.25% month-on-month and 3.8% year-on-year. The year-on-year numbers continue to fall, however it is clear that the ‘last mile’ to bring the CPI numbers back to the Fed’s target are going to be difficult.

With the US equity market having had a negative week, after a very impressive nine consecutive weeks of gains, sentiment is clearly a little shaken ahead of the US CPI release. This week, alongside the CPI report are a series of Fed speakers, a number of Treasury auctions which will test appetite for US Treasuries at the current yield levels and also the latest New York Fed 1-year inflation expectations.

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

Charlotte Clarke

09/01/2024

Please see this week’s Tatton Monday Digest update received this morning:

Overview: After the party, the hangover

After the Christmas party, January perhaps started with a bit of a hangover. After an exceptional last two months of 2023, both equity and bond prices fell back last week as trading volumes normalised. UK and US yields were up quite sharply on the week, at 3.80% and 4.05%, respectively. Equities also responded in their usual way of falling back some 1%-2% through the course of the week, with some notable underperformance from tech-related stocks.

Professional investors, like us, seem to have looked at the lower yields on bonds and larger cap equities and decided to take the near-term profit. In part, this may well be because they are making space in portfolios for potential new investment positions. Companies are seeing the lower cost of capital as an opportunity to finally replenish funds with new bond issues, and equity issues in the form of initial public offerings (IPOs) and convertible bonds offering the appealing combination of bond-like downside protection with equity upside.

Such behaviour is born of optimism rather than pessimism. Companies want to raise capital because their business can generate a better return than the cost of that capital (even at these relatively higher rates than in the past few years) and investors believe in the new opportunities. It also suggests that capital markets are more in balance now than they were in December, when optimism rose but corporate treasurers wanted to wait until the new year.

The real news of the week was that the narrative of global policy rates being cut sometime in the second quarter took a hit. European inflation data was in line with – but not below – expectations while US December employment data was the same as November’s very surprising low of 3.7%. Indeed, the evidence suggests employment tightened at the end of the year, something that should bolster consumption but will do nothing to reduce robust wage growth. Low inflation data may help for this month, and possibly next, but rate cuts in March and April look as far-fetched as we thought they did at the tail end of last year.

US election: will a Trump candidacy shake markets?

When America votes, the world watches. Ever since Donald Trump announced his first presidential campaign in 2015, melodrama has given global audiences another reason to tune in. And with criminal charges piling up against the former president – but not even scratching his campaign for his party’s candidacy – the 2024 election is sure to be Trump’s most dramatic yet.

Strangely, though, that established truth does not usually extend to investors. Looking back, the 2020 election had little impact on the US stock market either before, during or after the fact. This was despite an extremely politically volatile campaign that ended in accusations of fraud and an attempted insurrection. Trump’s shock victory in 2016 initially knocked US equities, as investors feared the destabilising effects of a divisive political novice in the White House, but this downturn was recovered within days and markets later surged in what was wryly called the ‘Trump rally’.

The big question as we head into this election year is: can markets ignore US politics again? Judging by market reactions – or lack thereof – to Trump’s myriad legal troubles in 2023, it seems possible they can, but it is hard to analyse because of a lack of clarity about implications regarding market expectations. Many think that Trump gaining the Republican Party candidacy, and thereby featuring on national presidential ballots, is inevitable, but while Trump has a dominant lead over Republican rivals, his legal battles – in particular cases relating to his attempts to overturn the 2020 election result – could still sink his campaign.

That said, there is a growing feeling that, if Trump makes it onto the ballot, he will likely win in November. This is supported by his polling lead against President Biden, both nationally and in key swing states. Again, there are many unknowns here – including whether Biden himself will feature on the ballot, and whether economic improvements might rescue his dire popularity ratings before polling day. But a second term for Trump is certainly enough of a likelihood that investors and American citizens have to seriously consider it. For many Americans, the thought is extremely unpalatable, to put it mildly. There is a large group of liberal-leaning highly educated urban-dwelling citizens who think a second Trump presidency – combined with a radically conservative Supreme Court – could destroy the liberal democratic institutions that keep the republic running. That demographic tends to skew wealthier than rural less educated counterparts and, as such, makes up a much larger proportion of US domestic investors.

We have written much recently about the prolonged outperformance of the US, and whether it can continue now that its assets have become much more expensive compared to Europe and EMs. A change of market fortunes, as we argued before, needs a catalyst. Half the US fearing the death of democracy could be such an event.

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

08/01/2024

Please see below, a short update from Copia:Capital which illustrates key recent figures from financial markets. Received this afternoon – 03/01/2024

Last Week:

• Global stock markets recorded their strongest year since 2019 after markets rallied for the last two months of the year. The MSCI World Index, which is a measure of the world’s developed equity markets, finished up 22 per cent over the course of 2023. This was largely led by the S&P 500 index was up 24 per cent over the year and rose 14 per cent since October.
• Asset managers launched the lower number of funds in the UK in 20 years. Morningstar reported that 397 funds were launched during 2023 which was down a quarter from the year before and much lower than the 899 launched at the peak in 2010. The drop in demand for funds came after investors shifted towards cash funds to avoid higher volatility. 
• There was record inflows into US money market funds in 2023 as investors were drawn to the high risk-free yields offered. Asset passed $6.3trn in US money market funds and US money market fund providers collectively earnt $7.6bn in fees over the year from these funds. The rates in money market funds have been much higher than previous years as a result of higher interest rates while the added volatility in equity markets have pushed more investors into money market funds.

Coming Up:

• US Initial Jobless Claims data released, Thursday 4^th January 2024 at 1:30pm.
• EU December CPI data released, Friday 5^th January at 10:00am. 

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

Alex Kitteringham

3^rd January 2024