Blogs

Please see the below article from EPIC Investment Partners providing their commentary on the FOMC Hold Rates/The Old Lady’s Table Mountain. Received this morning 02/11/2023.

The FOMC held interest rates at the 22-year high for the second straight meeting, albeit with Fed Chair Powell keeping the door slightly ajar to the possibility of additional tightening. Overall, there were very few changes to the accompanying statement to that given in September. All in all, Powell continued to acknowledge the downshift in inflation, whilst warning it was not “yet definitive enough”, adding that while the labour market is “rebalancing” it remains tight. He also reiterated the strength in GDP growth, but also acknowledged that “many forecasters are forecasting it will be slow”.  

In the Q&A after the release, Powell reiterated that the Fed remains on guard against inflation threats. However, he didn’t specifically suggest that a resumption of hiking is imminent. In response to a question about whether financial conditions are sufficiently restrictive to get inflation to 2%, Powell said: “We haven’t made any decisions about future meetings. We have not made a determination and we are not confident at this time we have reached such a stance. We are not confident that we haven’t or we have. That is the way we are going to be going into these future meetings, is to be, you know, determining the extent of additional further policy tightening that may be appropriate to return inflation to 2%.” 

With regards to the tight labour market and wages, Powell noted: “What we have seen is a very positive rebalancing of supply and demand, partly through just much more supply coming online”.  “If you look at the broad range of wages, wage increases have really come down significantly over the course of the last 18 months, to a level where they are substantially closer to that level that would be consistent with 2% inflation over time. We can proceed carefully at this time”, Powell added. 

Eyes now turn to the Old Lady at midday as she looks set to hold rates on the “Table Mountain” strategy as evidence continues to mount that the economy, labour market and inflation are weakening. At the time of writing, money markets are pricing a less than 5% chance of the BoE hiking rates. 

The Table Mountain term comes from BoE Chief Economist Huw Pill, speaking in Cape Town recently, where he stated he supports the idea of a lower peak for interest rates and holding them there for longer to contain inflation, hence the Table Mountain approach.

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

Alex Clare

02/11/2023

Please see the below article from Brewin Dolphin which covers their views on the past weeks market events:

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

Andrew Lloyd DipPFS

01/11/2023

Please see below Brooks Macdonald’s Weekly Market Commentary received yesterday afternoon 30/10/2023

• US equity market enters correction territory after falling more than 10% from its July peak

• Eurozone CPI and GDP will be in focus this week ahead of Friday’s US employment report

• Central banks from Japan, the US and UK will all issue their latest guidance this week.

US equity market enters correction territory after falling more than 10% from its July peak

After the US equity index moved c. 0.5% lower on Friday, the index has officially entered correction territory, being now more than 10% lower than its end of July peak level. Of those losses, around half of them have taken place in the last fortnight alone. Friday’s losses occurred despite strong results from Amazon and Intel which were released after the market close on Thursday.

Eurozone CPI and GDP will be in focus this week ahead of Friday’s US employment report

Starting with Europe, this week sees the release of the preliminary CPI releases as well as the Q3 GDP numbers. In terms of GDP, economists expect for there to have been no growth across the Eurozone in Q3 with the year-on-year growth rate at just 0.15%. Both headline and core Eurozone CPI readings are expected to cool with the headline rate expected to lurch lower from 4.3% year-on-year to 3%. The main US datapoint this week will be the US employment report on Friday where consensus expects 189k jobs to have been created after a blockbuster September that saw 336k new jobs. Before we get to Friday we will see the ECI, JOLTS, ADP and initial jobless claims data which will all give their own insights into the labour market. Lastly, earnings season continues apace this week with Apple releasing on Thursday likely to be the highlight.

Central banks from Japan, the US and UK will all issue their latest guidance this week

This week sees the Bank of Japan, Federal Reserve and Bank of England issue their latest monetary policy guidance. The Bank of Japan concludes its meeting tomorrow with investors split on whether the central bank will abandon the yield curve control which effectively caps yields on government bonds through quantitative easing. The BoJ is likely to revise up its near-term inflation forecasts which will put the bank under pressure. Then on Wednesday we hear from the Federal Reserve which is expected to stay on hold, but investors will be looking for guidance on December’s meetings. A strong US economy makes the argument for a December interest rate hike but equally the recent run-up in Treasury yields is doing some of the Fed’s work for it already.
Our last central bank this week will be the Bank of England on Thursday. The Bank of England is not expected to raise interest rates or change its guidance however there is likely to be some dissent amongst voting members. Several members are concerned by the still strong pace of wages, favouring additional hikes, though these individuals are likely to be outnumbered by those cautious around the strength of the UK economy.

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

Charlotte Clarke

31/10/2023

Please see below, the ‘Monday Digest’ from Tatton Investment Management providing a brief analysis of markets and the key news from global economies over the past week. Received this morning – 30/10/2023

The resilience narrative comes under pressure

In recent times, a fall in bond yields (and therefore a rise in bond prices) would go alongside rises in equity prices, particularly the mega-cap growth consumer-related techs like Amazon, Alphabet (Google), Microsoft and Apple. However, last Thursday, US Treasury long maturity bond yields started to retreat from highs but US stocks carried on lower. In the credit markets, despite the higher government bond prices, corporate bonds were flat to weaker, especially among the more indebted companies. If this new dynamic continues, it may signal a change in investor expectations about the resilience of US sales and earnings growth.

In particular, concerns are building that the US consumer is running out of steam. The third quarter corporate results at Alphabet, Amazon and Meta were seen as good as they will be for the foreseeable future. Investors are worried the digital ad market is slowing. Meta disappointed (shares dropped more than 4%) after its executives warned of softer advertising spending, Alphabet slumped 9.5% last Wednesday, and despite a healthy quarter, Amazon stock was still down on the week and -17.5% below its 13 September high for the year.

To us, this seems to indicate waning investor confidence in US consumption. As a consequence, the stock market leadership of just a handful of darlings is waning.  This is not necessarily a bad thing, but the risk is that it leads to a more significant correction beyond those names. US consumers could suddenly feel a lot less well-off, slowing demand much too quickly. This would force central banks into slashing rates much earlier than anticipated. The European Central Bank (ECB) met on Thursday and left rates unchanged (more on this below). The other global rate setters of the Federal Open Markets Committee and the Bank of England (BoE) meet next week. The stalling of the oil price and other energy price rises also should allow the rate pause to continue. All ears will be on the respective statements and press conferences. We expect dovishness from the BoE given the slowing inflation environment, the easing of employment tightness and the weak house market.

The oil majors double down

October has seen two of the biggest acquisitions in the history of the oil and gas industry. Last Monday, Chevron announced it will purchase fossil fuel producer Hess for $53 billion, less than two weeks after rival ExxonMobil agreed a whopping $59.5 billion deal for Pioneer Natural Resources. The megadeals have naturally caused stirs in the industry, suggesting anyone that thinks the world will soon wean itself off fossil fuels is kidding themselves. Clearly, corporates do not commit tens of billions without a plan that can withstand shareholder scrutiny. But, megadeals are not always a sign of confidence; rather than expansion, Chevron and Exxon might be consolidating ahead of an uncertain future.

This defensive interpretation is backed up by the fact that stock valuation premiums for recent oil and gas deals have been extremely small by historical standards. Pioneer sold for 9% above its market share price, while Hess Corporation accepted a 10% premium. There is probably a combination of motivations for these megadeals – partly defensive and partly bullish. This mixture has a lot to do with the particular environment that US oil majors find themselves in, certainly compared to global rivals. In the post-pandemic world, amid intense wars in Europe and the Middle East, energy security has become one of the top political priorities for every nation.

Europe’s quest for energy independence is inescapably tilted towards renewables: it has lots of capacity for solar, wind and hydro power (and relatively smaller distances for electric grids to cover) but little capacity to mine its own fossil fuels. The US has plenty of oil and gas, and its consumers are hesitant to change, particularly if that comes with higher short-term costs. For the world, we can hope that European reasoning wins out. Or that at least fossil fuel rich countries don’t lose track of alternatives and CO2 neutralisation technology development in parallel.

Is the ECB turning dovish?

Economic ills have put pressure on the ECB to slow, stop or even reverse its aggressive monetary tightening. Like most developed world central banks, the ECB is very worried about tightness in the labour market and the potential of the dreaded wage-price-spiral leading to persistent inflation (wages, profits and prices all increasing in response to each other). Wage rises in particular have been far outpaced by inflation in the Eurozone over the last year, meaning a sharp deterioration in household spending power, along with higher borrowing costs and a general dwindling of economic prospects. Speaking after the meeting, ECB President Christine Lagarde said growth is “likely to remain weak over the remainder of the year”. Policymakers are reasonably confident that price increases are coming under control, but – as the recent shift up in commodity prices and outbreak of another Middle Eastern war have shown – they are wary that externalities could turn for the worse, providing yet another input cost shock. Lagarde specifically mentioned the Israel-Hamas war’s potential effects on energy.

Over the last few years, the ECB has also made clear its concern for inflationary profit expansion – the flipside of the wage-price spiral, often ignored in British and US discussion. That being said, Europe is clearly in a different place to the US, where growth, jobs and consumer sentiment have been incredibly resilient despite a barrage of global pressures. We wrote last week that this was largely down to Americans’ willingness to draw on excess savings built up during the pandemic (though these are arguably dwindling, perhaps supporting the Fed’s recent decision to keep rates on hold). In Europe – and the UK for that matter – wage growth is moderating and consumers are clearly not feeling too confident.

The monetary impetus for inflation in Europe has fallen away, and there is no real economic impetus to replace it. A similar dynamic is taking hold in the UK – even if the Bank of England still has its hawks and hence might yet raise rates again. The US is not seeing this yet but, as we wrote last week, this is likely to change the more that excess savings come down. This side of the Atlantic, however, central bankers have every reason to turn dovish, and the evidence from last week’s meeting is that the ECB already has.

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

Alex Kitteringham

30^th October 2023

Please see the below article from Brewin Dolphin which covers their views on recent events in markets. Received 24/10/2023.

Stock markets slid last week as investors grew increasingly concerned about the Israel-Hamas war.

In the US, the S&P 500 suffered its biggest weekly decline in a month, falling 3.4%. The Nasdaq tumbled 4.3% and nearly entered bear market territory as long-term US Treasury yields hit a new 16-year high.

Indices in Europe also fell, with the Stoxx 600, Germany’s Dax and the FTSE 100 shedding 3.7%, 2.9% and 3.0%, respectively. Sticky inflation and concerns about interest rates staying higher for longer also weighed on investor sentiment.

 In Asia, China’s Shanghai Composite slid 3.0% and Hong Kong’s Hang Seng fell 2.7% following reports that property developer Country Garden had missed its final deadline for a coupon payment on a dollar bond.

Eurozone economic downturn accelerates

Stocks gave a mixed performance on Monday (23 October) ahead of a busy week of economic data and corporate earnings reports. The S&P 500 and the Dow ended the day in the red, whereas the Nasdaq rose 0.3% as investors awaited earnings reports from major technology stocks.

In economic news, the latest HCOB purchasing managers’ index (PMI) for the eurozone showed the region’s economic downturn accelerated in October, with the flash composite PMI output index declining to 46.5 from 47.2 in September. Excluding pandemic months, the fall in activity was the sharpest since March 2013. New orders fell at an accelerating rate and companies cut employment as a result, representing the first drop in headcounts since the lockdowns of early 2021.

In the UK, the S&P Global / CIPS flash composite output index measured 48.6 for October, up fractionally from 48.5 in September but below the 50.0 no-change mark for the third month running. Manufacturing output declined for the eighth-consecutive month. The FTSE 100 was down 0.7% at the start of trading on Tuesday.

UK inflation remains at 6.7% year-on-year

Last week saw the release of the latest UK consumer price index (CPI) report. Economists were expecting the year[1]on-year rate of inflation to decline in September. Instead, it held steady at 6.7%, triggering a sell-off in global bonds.

The data from the Office for National Statistics (ONS) showed rising prices for motor fuel were the main factor preventing a decline in the annual inflation rate. However, 24 October 2023 core inflation (excluding energy, food, alcohol and tobacco) was also higher than expected at 6.1% year-on-year, down slightly from 6.2% in August. Services price inflation increased from 6.8% in August to 6.9% in September, driven by more expensive hotel rooms.

 The Bank of England is still expected to keep interest rates on hold at its meeting on 2 November, but the data has added to uncertainty about the longer-term outlook.

Warm weather hits UK retail sales

The latest UK retail sales figures also proved disappointing. Figures from the ONS showed retail sales volumes fell by 0.9% in September compared with a month earlier, as unseasonably warm weather limited sales of colder weather clothing and consumers cut back on non[1]essential spending. The drop was much steeper than the 0.2% decline forecast by economists.

Elsewhere, GfK registered the biggest monthly fall in UK consumer confidence since 1994 (excluding the coronavirus pandemic) as consumers grew more concerned about the prospects for their personal finances and the wider economy. The latest gauge of consumer optimism dropped to a three-month low of -30 in October, down from September’s reading of -21.

US retail sales stronger than expected

In stark contrast to the UK, retail sales in the US smashed estimates. Sales rose by 0.7% in October, roughly double the consensus forecast for 0.3% growth. Fuel sales were a key driver, rising by 0.9% as prices at the pump increased (US retail sales figures are based on receipts, not volumes, and are not adjusted for inflation). Over the preceding 12 months, sales rose 3.8%, roughly in line with consumer inflation.

Separate data showed industrial production increased by 0.3% in September, higher than the expected 0.1% increase.

China GDP grows by 4.9%

China’s gross domestic product (GDP) grew 4.9% year[1]on-year in the third quarter, beating expectations for 4.5% growth. On a quarterly basis, GDP grew by 1.3%, improving from growth of just 0.5% in the second quarter, according to China’s National Bureau of Statistics. Retail sales figures were also encouraging, with sales up 5.5% in September from a year earlier, improving from 4.6% growth in August. The data, however, was overshadowed by ongoing troubles in China’s property market. New home prices fell in September for the third-consecutive month.

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

Alex Clare

25/10/2023

Please see the below Tatton Investment Management Monday Digest article received this morning – 23/10/2023.

Overview: Bond yield volatility has markets guessing
While the human suffering in the Middle East conflict worsened, capital markets have still not meaningfully acknowledged the rising geopolitical risk, beyond the slight increase in oil prices that was already under way a week ago. Nevertheless, the volatility in long bond yields continued as the global benchmark US 10-year government yield yo-yoed between 4.5% and 5.00%. The risk premium for accepting fixed yields for longer periods remains the talk of the investment community at large. Fact though is that investors now want more reward for any new investment beyond cash.

What’s been interesting in past weeks is that the biggest relative change in required risk premium (that incentive of extra expected return) has been in the assets generally described as the least risky – government bonds.  The 10-year US Treasury yield traded at 4.992% last Thursday. Some of this rise is attributable to rising inflation fears although (oddly, given the oil price rises) not in the near-term – the fears seem to be more visible in five years’ time. It seems that investors hear the words ‘risk-free asset’, but perceive long-term US Treasuries bonds as one of the riskiest of defensive assets.

To sum up, one reasonable conclusion to draw from the raging debate is that this inflation-fighting tightening cycle may have indeed reached its nadir. Therefore, the emerging crunch point is whether the higher rates and yields are slowing activity just enough to declare victory over inflation (so we get away with an economic soft landing over the coming months), or whether the additional dynamics introduced by the ‘collateral damage’ of the high yield environment leads to an acceleration in the slowdown – or even possibly trigger a credit default cycle – all of which causes central bank tightening to turn into a policy error outcome that leads to a hard landing recession. We continue to watch credit spreads and stories related to default stress, which have increased but not to worrisome levels. Market liquidity remains good and intraday volatility well within the usual boundaries. This can all change quickly, but currently give little reason for concern, but equally the conditions are not tempting us to declare and position investor portfolios for one outcome or the other.

Chip cycles and tech bubbles
The microchip industry is in an odd place. On the one hand, investors have been eager to eat up anything related to the generative AI boom. This has given a huge boost to companies like high-end chipmaker Nvidia, whose share price has risen an eye-watering 192% year-to-date. On the other hand, more ‘traditional’ semiconductor manufacturers – those specialising in large-scale production of run-of-the-mill microchips – are struggling under the weight of a substantial cyclical downturn. Some analysts even think global semiconductor revenue will decline for the first time since 2019, and many chipmakers have announced plans to cut back production or capital expenditure.

Nvidia specifically has been hit by the US government’s decision to stop it selling high-end microchips to China – where 25% of its data centre chip revenues reportedly come from. Controls were introduced a year ago, but the Biden administration last week announced a tightening of restrictions to curb China’s technological advancement. Nvidia shares – previously the darling of tech investors – have fallen by 9% in the last five days. It is a reminder that, even if AI technology itself is genuinely transformative, it means little to businesses if they cannot (either through ability or government intervention) capitalise on it. One could easily argue that current chipmaker stocks are undervalued relative to AI-propelled peers, certainly if the US Federal Reserve achieves its fabled ‘soft landing’ and eases interest rates without ever triggering a damaging recession. What it suggests to us is that structural stories around AI and innovation may have their place, and will be especially visible in hindsight, but cyclical factors driven by supply and demand are at least equally important.

How far can Americans run down their savings?
One of the biggest investment topics over the last few years has been so-called ‘excess’ savings. Over the pandemic, consumers across major developed economies tucked away huge rainy-day funds, some of which were spent as the world opened up. This is usually cited as a major factor behind the extraordinarily resilient post-pandemic economic figures. Central banks have therefore paid close attention to consumer savings, and as we come to the inflection point for global interest rates, predicting what will happen to excess savings is crucial to any outlook for inflation or monetary policy.

What this means in practice is much harder to tell. Economists are unanimous that lockdowns and fiscal handouts caused consumers to save more than they normally would, but putting a precise figure on this requires figuring out what the ‘normal’ rate would have been. Then there is the question of how much of those excess savings are still available. The US, experiencing the high and consistent GDP growth, also saw a sharp reduction in consumer savings rates as we came out of the pandemic. Others, like the UK and Eurozone, still have savings rates above their pre-pandemic averages.

Back in June, Federal Reserve Board economists predicted US excess savings would run out by the third quarter of 2023. At which point, one would expect consumption to fall back in line with underlying real income, which itself is slowing. That suggests a significant slowing of US consumer demand, bringing down both growth and inflation. This scenario is broadly in line with the latest economic data, which has shown a cooling of US growth without an outright downturn, and it also makes sense of the Fed’s recent pause on interest rates. But on the other hand, betting against the US consumer has been a losing game over the last few years; they have been incredibly resistant to things that we might have thought would knock their sentiment or spending habits. Moreover, US Americans, more than most developed world consumers, are big investors in their own stock market. Its stellar performance has had a direct impact on their abilities to spend. A reversal of this trend could be triggered by a US financial shock, though that does not look likely at the moment. It could also come from a sharp reduction in US fiscal spending, for example under a deficit-busting Republican presidency. All of these scenarios are shrouded in uncertainty. US outperformance has no immediate threats, but with savings in the balance, it looks more fragile than it has in years.

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

Charlotte Clarke

23/10/2023