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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global market update as tensions appear to settle in the Middle East.

What has happened

Monday saw a modest recovery in markets in aggregate – it was enough for US equities to end their back-to-back run of 6 daily declines in a row, with the US S&P 500 equity index ending the day up +0.87%. With hopes that Middle East tensions were easing back a little for now at least, oil prices edged lower with Brent crude dropping back -0.33% to US$87 a barrel, its lowest level so far this month. Bucking the improved sentiment however are Chinese stocks, with both China’s CSI and Shanghai Composite equity indices trading lower currently. In bond markets, government 10-year bond yields edged lower (bond prices rose) in both the US and Europe on Monday.

Japan’s flash PMIs land

Today sees the latest preliminary, so-called ‘flash’ Purchasing Manager Index (PMI) surveys land for the month of April for a number of countries globally, across Asia Pacific, Europe, and the US. Over in Japan, manufacturing and service activity improved in April to its highest levels in nearly a year, with the April flash manufacturing PMI up to 49.9 (from 48.2 in March), and just below the 50 mark which marks the dividing line between month-on-month (MoM) contraction versus expansion in activity levels. Meanwhile, Japan services PMI rose MoM, to 54.6 in April (up from 54.1 in March), so the economy is still being services-led relative to manufacturing currently, a not-unfamiliar theme in other developed economies around the world.

Middle East tensions ease a little

Middle East tensions appear to have continued to ease so far this week. Yesterday, Iran’s foreign ministry spokesman said that Israel had received the “necessary response at this stage”. This proved enough for oil prices to drop, as well as a pull back in the gold price which fell -2.59% on the day and which is down again this morning at the time of writing.

What does Brooks Macdonald think

US megacap technology stocks narrowly led the market yesterday, but it was a mixed affair with Tesla weaker. All eyes now turn to the 4 of the so-called ‘Magnificent 7’ which report this week, starting with Tesla due after the US close later today.

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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global market update following the recent attacks by Iran on Israel.

What has happened

Following the unprecedented direct attacks by Iran on Israel over the past weekend, Middle East tensions continue to run high. There are still concerns around what Israel’s response is going to be, despite ongoing efforts by the US and allies to try to deescalate things. In equity markets, the US S&P500 index posted its weakest 2-day run on Monday since the US regional banking hiatus last March (falling -1.20% yesterday after -1.46% on Friday).  The so-called ‘fear gauge’, the VIX volatility index (which is based off the S&P 500 equity index), rose +1.9 percentage points to 19.2 yesterday, seeing its sharpest two-day rise also since March last year. Corresponding with the risk-off mood, US 10-year Treasury government bond yields rose 8 basis points (bps) to their highest level in five months on Monday to 4.60%, and oil prices (Brent crude June futures) have edged higher this morning, trading back up above US$90 per barrel currently.

A mixed data bag from China

Overnight investors have received a rather mixed bag of economic data out from China, where it seems the economy’s strong start to 2024 is already losing steam. On the surface, China’s Gross Domestic Product (GDP) climbed +5.3% in Q1 2024 in year-on-year (YoY) terms, accelerating slightly from the previous quarter, where Q4 2023 was up 5.2% YoY, and ahead of expectations of 4.8%. However, much of the bounce came in the first two months of the year. In March, growth in retail sales slumped (growing +3.1% YoY, down from +5.5% YoY in February and below estimates looking for +4.8%), and industrial output decelerated below forecasts (+4.5% YoY in March, down from +7.0% in February and below estimates looking for +6.0%). Finally, in the all-important property sector, Chinese house prices continued to fall in March, dropping -2.7% YoY, and worse than the -1.9% drop in February, suggesting China’s property market is struggling to find a floor.

Allies try to deescalate Middle East tensions

All eyes are on the Middle East at the moment. Yesterday, a number of Western allies cautioned Israel against an escalation following Iran’s attacks at the weekend: French President Emmanuel Macron said, “we’re going to do everything we can to avoid flare-ups, and try to convince Israel that we shouldn’t respond by escalating, but rather by isolating Iran”; UK Foreign Secretary David Cameron said that “we’re saying very strongly that we don’t support a retaliatory strike”; and US President Joe Biden said the US “is committed to Israel’s security” and “to a ceasefire that will bring the hostages home and prevent the conflict from spreading beyond what it already has”. Against this, news website Axios reported yesterday that Israel’s defence minister Yoav Gallant told US Defence Secretary Lloyd Austin that Israel couldn’t allow ballistic missiles to be launched against it without a response – further it was reported by news channel CNN that Israel’s war cabinet reviewed military plans for a potential response in a meeting on Monday, without clarity on whether a decision had been taken.

What does Brooks Macdonald think China’s recovery has been somewhat unbalanced since pandemic restrictions were lifted at the tail-end of 2022 coming into the start of last year. While manufacturing is holding up, there is a continued real estate downturn which is weighing on confidence. Further, the hope that China can rely on adding to manufacturing, arguably adding to overcapacity there, in order to try to export itself out of its economic challenges is meeting somewhat protectionist resistance from other countries – the European Union having only recently initiated a raft of investigations against China, including an investigation into Chinese subsidies for electric vehicles. For China, it is simply down to the composite weights of the various sum of the parts of China’s economy. The pickup in the Q1 GDP numbers was almost entirely driven by public investment – in contrast, underperformance in production and private demand suggest China’s recovery is still on thin ice. Ultimately, such is the weight of China’s property sector as a share of GDP (some market estimates put property-related activities having in the past contributed as much as a c.30% share of China’s economy, roughly that for the US by comparison), that without significant intervention here, something China’s policy makers still appear loath to do, there is arguably not enough impetus elsewhere to give broader economic growth in China the so-called ‘escape velocity’ it really needs.

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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global market update for your perusal.

What has happened

Government bond pricing in both the US and Europe fell back (with bond yields rising) on Monday, as markets moved to cut hopes for the number of interest rate cuts this year. For context, at the start of the year, markets were pricing in more than six quarter-percentage-point cuts this year from the US Federal Reserve (Fed) – on Monday, this number was standing at less than three. Adding to the latest shift in view, US bank JPMorgan CEO Jamie Dimon said in his annual letter to shareholders, that the US economy “is being fuelled by large amounts of government deficit spending and past stimulus …  this may lead to stickier inflation and higher rates than markets expect.” Staying with inflation, ahead of tomorrow’s US consumer inflation data, yesterday we got the latest New York Fed Survey of Consumer Expectations – to be fair it showed a bit of a mixed picture on inflation expectations, though the good news is that 5-year expectations fell by -0.3% points on the previous month, down to +2.6%,

Markets now fully pricing in just two rate cuts from the Fed

Market confidence around the number of interest rate cuts out of the Fed looked to wane further on Monday. Verus the Fed’s ‘dot plot’ of its members which showed last month a median expectation of three quarter-percentage-point cuts this year, markets on Monday moved to price in 61.5 basis points (bps) of cuts by the Fed’s December 2024 meeting, a fall of -3.3bps on the previous day – it implies that only two 0.25% rate cuts are currently being fully discounted.

Middle East tensions take a breather, but China fills the geopolitical gap

Oil prices saw a modest dip down from a five-month high on Monday after Israel said it would remove some troops from Gaza, helping to cool some of the previous week’s geopolitics-led gains. Instead, China looked to be filling the geopolitical gap on Monday- it emerged that US President Biden is expected to warn China about its increasingly aggressive activity in the South China Seas later this week during planned summits with Japan and the Philippines. According to newswires yesterday, a senior US official was quoted as saying that “China is underestimating the potential for escalation … China needs to examine its tactics or risk some serious blowback.”

What does Brooks Macdonald think

There is debate currently as to whether we might see some interest rate policy divergence between the Fed and the European Central Bank (ECB). In the case of the Fed, the probability of an interest rate cut by the US central bank’s June meeting is down to just 52% currently (the lowest since October last year), and the total number of Fed cuts priced by the December 2024 meeting is now just 61.5bps. Contrast that with the ECB where the probably of a cut by June is higher at 91% currently, and the total number of cuts by December 2024 is also higher at 80.5bps currently. All in all, it points to a contrast in the differing economic backdrops with the US showing relatively stronger economic growth currently, but with it, the risk of relatively stickier inflation as well.

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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global market update for your perusal.

What has happened

Equity markets were initially building for a small up-day yesterday, but after Europe closed, in later US hours trading things took a sharp turn down. The US S&P 500 equity index fell by over 2% intraday, ending the session down – 1.23%. The main catalyst for the fall was rising tensions in the Middle East, which has pushed oil prices higher, and in turn adding to worries around the risks for resurgent inflationary pressures. In better economic news, yesterday saw the Euro Area composite PMI (Purchasing Managers Index) which was up to 50.3 for March, versus February’s 49.2, and marking the first time it has been in expansionary territory in ten months. Later today, markets will be focused on the US labour market, with US non-farm payroll numbers for March due – payrolls are seen increasing by at least 200,000 for a fourth straight month. Average hourly earnings are projected to climb 4.1% from the same month last year, which would be the smallest annual advance since mid-2021.

Oil prices hit $91 a barrel

Brent crude oil prices have made new 5-month highs in early trading this morning, building on yesterday’s gains, and briefly trading above $91 per barrel. The latest rise follows mounting geopolitical tensions around the Middle East – Israel has increased preparations for potential retaliation by Tehran after Monday’s strike on an Iranian diplomatic compound in Syria. Meanwhile, US President Joe Biden told Israeli Prime Minister Benjamin Netanyahu this week that US support for the war in Gaza depends on new steps to protect civilians. Separately, Netanyahu said at his country’s security cabinet meeting that Israel will operate against Iran and its proxies and will hurt those who seek to harm it. Oil has rallied this year on the back of combination of tightening global supplies, better than expected demand, and geopolitical risks in both Russia-Ukraine and the Middle East. Finally, regarding Russia, a NATO official said yesterday that Ukrainian drone strikes on Russian refineries may have disrupted more than 15% of Russian capacity, potentially adding to supply constraints.

US dollar strength is not good news for some

This year has seen an arguably already strong dollar move stronger, boosted as markets have in recent months reduced their expectations for the scale of likely Fed rate cuts later this year. As a result, a resurgent US dollar is causing problems for central bankers and governments around the world, forcing them into action to relieve the pressure on their own currencies. By way of example, Japan’s Finance Minister Shun’ichi Suzuki last week warned of “bold measures” to bolster the yen, while Turkey unexpectedly hiked interest rates last month, and elsewhere, Swedish officials have recently said a weaker krona could delay its first move to ease interest rates.

What does Brooks Macdonald think

Exchange rates matter because a depreciating currency can risk increasing the cost of imported goods for the country in question, leading to a drive-up in inflation. Meanwhile, there’s also an increased risk that investment flows could also move away from a country with a weakening currency in search of higher expected returns elsewhere. This so-called ‘capital flight’, which can harm domestic investment and growth, can be a risk for some emerging market countries in particular given their often relative economic reliance on investment inflows to start with.

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Tatton Monday Digest

Please see below article received from Tatton this morning, which provides a positive update on global markets.

Overview: Stick to the Plan

Brighter days for markets; returns were strong across the board last week, thanks to central bank messaging.

The Bank of England (BoE) “has done its job” according to Governor Bailey, and “we are not seeing a lot of sticky persistence” in inflation. Markets are pricing cuts in July, with rates settling at 3.5% in 24 months. If the BoE moves rates in line with economic activity, though, it would mean rates between 3% and 3.5% in around 18 months on our calculations.

The hawkish Monetary Policy Committee members are less hawkish now that inflationary behaviour has dissipated. Recent data shows more money is being spent, but the rise is slow. It vindicates the BoE’s wait-and-see approach. Comments suggest MPC members now fear low growth more than inflation, which could mean a rate cut in May if April inflation is lower than 2%, as expected.

The ECB could join in, after telling us that “rate cuts are coming”. Manufacturing confidence is low, and Switzerland cut rates during the week, supporting the notion of an ECB cut. The Bank of Japan actually raised rates, but markets acted like they cut (see article below). There was weakness in China – the heart of global disinflation – which led to falling Chinese bond yields and possible policy giveaways from Beijing. 

The Federal Reserve said it was still expecting to cut rates, despite US inflation picking up. There is a growing confidence that the US economy is balanced, despite continued economic strength. But strength is a complication for chairman Powell’s plan. The Fed expects 2.1% real growth and 2.4% inflation in 2024, but things will have to slow from here to achieve that – and current activity is rising.

Central banks feel vindicated in sticking to their plans: inflation is down and activity is not too bad. For the Fed specifically, this might be overconfidence, but that will be good for company profits in the short-term. Our only worry is that, if inflation does move higher, the nice rate cut narrative might shift suddenly.

Japan’s rates are go – and markets up with them

The Bank of Japan (BoJ) raised interest rates for the first time in 17 years last week. The hike, from -0.1% to a range between 0% and +0.1% might seem tiny, but it is big and symbolic for the Japanese. The BoJ becomes the last central bank to end negative rates, curtailing the era of no payouts for Japanese depositors. 

Markets reacted unintuitively. The value of the yen fell sharply, the currency now at ¥151 on the dollar. Bond yields also fell, with Japanese 10-year yields now well below the 1% peak from October. Equities rallied too, and the Nikkei 225 up over 20% year-to-date. All of these are the reverse of what you would expect when Japan’s monetary policy is finally tightening. 

Markets acted like the BoJ cut rates instead of hiked them, because the decision came with dovish signals. Japanese inflation is now barely above the bank’s 2% target and trending down, so BoJ governor Kazuo Ueda has said borrowing costs will not go up sharply. Market positivity – which pushed the Nikkei past its 1989 asset bubble peak only last month – should help stave off a return to deflation.

Japan’s goods, services and labour are extremely competitive after decades of stagnation. There have been corporate structural changes in the last decade which will help take advantage of that too – resulting in the biggest wage increase since 1992. Structural changes, the third arrow of the late Prime Minister Shinzo Abe’s “Abenomics”, have finally hit home. This will likely mean stronger inflation and nominal growth, even if still low compared to the world.

Thankfully, the BoJ is keeping rates low relative to the expected growth, with real (inflation-adjusted) rates still negative. It refuses to do much in the face of inflation, and Japan’s economy should benefit.

Neom and the Saudi Line

Saudi Arabia wants to create the future of sustainable living in Neom, a futuristic megacity featuring “The Line”, a linear ‘smart city’ with no cars or fossil fuels. There is understandable cynicism in the West, considering the country is the world’s largest oil exporter and currently imports 80% of its food. Critics have called it “greenwashing” or purely PR, similar to Saudis’ extensive sports investments.

But at a top estimated cost of $1 trillion ($500bn on the low end), Neom would be by far the most expensive publicity stunt in history. There are more cost effective ways of improving image that Riyadh is already pursuing – like forcing international companies to set up Saudi headquarters or joint ventures in exchange for government deals. Many big names have already done so, and more are sure to follow.

The huge sums and coordinated policies tell us Crown Prince Mohammed bin Salman is serious about diversifying the Kingdom away from oil exports. It obviously has an interest in promoting oil, but the nation’s long-term interests are to no longer rely on the industry. 

Part of the ‘Saudi Vision 2030’ campaign is about aligning Saudi Arabia – which has a higher GDP per capita than several European nations – with global economic and financial institutions. Its links to the global economy are currently one-track, and there are opportunities in diversifying them. 

That requires upfront capital, and Riyadh is certainly willing to spend it. Not only might the Kingdom’s massive reserves be put to work for global companies, but the domestic stock market – including the world’s most profitable company Saudi Aramco – might be opened up too. It means a reallocation of capital towards newer, hopefully productive, areas. Opportunities are there, but risks of congestion and misallocation are too.

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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a global economic and market update.

What has happened

Over the past week, the financial markets grappled with persistent inflationary pressures. Key economic indicators, such as the US Consumer Price Index (CPI) and Producer Price Index (PPI), exceeded forecasts, signalling more persistent inflation. Concurrently, oil prices experienced a significant uptick, with Brent crude reaching $85 per barrel, a high not seen since October. These developments prompted a reassessment of the Federal Reserve’s potential interest rate trajectory. Market expectations for a rate reduction by the Fed shifted, with futures markets now indicating approximately a 60% likelihood of a cut by June, a stark contrast to the nearly certain expectation of a cut two weeks prior. The prospect of fewer rate cuts led to a rise in global yields and a slight downturn in equities. The S&P 500 fell 0.13%, and the small-cap Russell 2000 index was particularly hard hit, falling by 2.08% over the week .

Important decision from the Bank of Japan tomorrow

The Bank of Japan (BoJ) is poised to terminate its negative interest rate policy (NIRP), which would represent its first rate hike since February 2007. The BoJ is reportedly considering an increase in the short-term interest rate from the current -0.1% by over 10 basis points to a range between 0% and 0.1%. This move is based on the assessment that economic conditions are now favourable for achieving a stable 2% inflation rate. In addition to ending NIRP, the BoJ is also expected to discontinue its yield curve control (YCC) policy and halt new purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), although it may maintain some level of Japanese government bond (JGB) purchases to manage yield volatility post-policy change.

What does Brooks Macdonald think

The upcoming week could be pivotal for the financial markets, as we will see multiple central bank decision. The most important one is Bank of Japan, which is likely to increase rates to 0% tomorrow, marking an end to the era of global negative interest rates. This event may overshadow the Federal Reserve meeting on Wednesday, where no interest rate adjustment is expected but it should provide insights into the Fed’s stance on inflation. Additionally, the Bank of England (BoE) is scheduled to hold its policy meeting on Thursday, rounding out a significant week for central banks worldwide.

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US Elections: How Biden and Trump could impact markets

Please see below article received from M&G Wealth Investments yesterday afternoon, which anticipates the markets’ reaction to the result of the November 2024 US presidential election.

2024 has a busy election calendar and governments may be more inclined to reduce taxes and spend more, in an effort to win over voters.

The November 2024 US elections are still a long way off but with the US Presidential nominees now set, we’re starting to think about the future outcomes and market scenarios. Given the sharp policy differences between the two political parties the election outcome could have profound political, economic and market implications – but this is also dependent on the scale of the candidate’s victory. These are our thoughts and what we’re watching:

2025: Expect a deluge of legislation

In the past decade, presidents have moved to enact their flagship policies early in their term. This is because there’s a risk of the House and Senate changing in the ‘mid-term’ elections two years later. In addition, political parties tend to stop working to pass legislation or approve new appointments in the run up to elections. For example, Donald Trump’s key policy of tax cuts was delivered in 2017 and reduced the headline rate of corporate taxes from 35% to 21%. President Joseph Biden’s Infrastructure legislation came in 2021 and the Inflation Reduction Act in 2022. These are examples of key policies that have influenced the US economy and markets.

What does this mean? There’s a narrow window for legislation to be passed in the US. Regardless of who wins, we expect a deluge of new legislation in 2025 and we would expect both candidates to continue spending and borrowing.

If Biden’s Back

We’d expect a Biden victory to reinforce the existing agenda of The American Jobs Plan – investment in infrastructure, transportation, and manufacturing, alongside a focus on building alliances abroad.

Regulation of technology companies and artificial intelligence could be a new area of focus. So far, the European Union has been taking more significant actions to regulate technology companies than the US. We could see this change, as artificial intelligence impacts more areas of society. Within the election itself, the ability to create fake videos, images and voices could have a profound impact.

Immigration is also likely to be high on the agenda, as it’s a key political issue. Biden recently negotiated an agreement on immigration with the US Senate. However, the House of Representatives has declined to consider it citing that it’s too close to an election. If the House of Representatives doesn’t take any action on the current proposal, Biden will want to do that quickly at the start of his next term.

If Trump is Triumphant

We expect to see large tax cuts for companies and individuals if Trump prevails. The real estate sector would likely be a significant beneficiary, as this would support Trump’s personal business interests. Reducing corporate taxes would boost company profits, so we’d probably see an initial boost for stocks. Consumer spending power would increase as well. Longer term, though, this could lead to higher inflation.

Trump has made no secret if his disdain for higher interest rates. It’s not surprising, given that higher interest rates create a more challenging environment for property developers. Jerome Powell’s term as Chair of the US Federal Reserve ends in 2026 and the next President would have to nominate a successor. Trump might replace Powell with someone more likely to reduce interest rates. There is a longer term risk that if Trump were able to appoint several individuals to the Federal Reserve board willing to take direction from him, then monetary policy could cease to be fully independent. A scenario where the market loses confidence in US monetary policy is the biggest risk to financial markets. We might see interest rates reduced in the short term, but combined with tax cuts this could lead to higher inflation in the long run.

Foreign policy would also see change under Trump, with the United States pulling back from international diplomacy. Laws have been changed to prevent Trump from withdrawing the US from North Atlantic Treaty Organisation (NATO), a joint defense agreement created after World War 2.  He could undermine it in other ways, such as not providing funding or not appointing representatives to interact with the organization. With the conflict between Ukraine and Russia ongoing, this would weaken Europe’s position.

What does this mean for investors?

Markets tend to look through election ‘noise’ in the run-up until the outcome is better known. The US economy is in a strong place as a result of four years of spending and investment. It’s an increasingly insulated and self-sufficient economy. We haven’t changed our investment approach in anticipation of the election.  If Trump is re-elected then we expect increased volatility and unpredictability.  But, even with Biden continuing for a second term we’re still likely to face a volatile environment.

Over the past year, we’ve increased exposure to government bonds. Government bonds, and particularly US Treasuries, can perform well during periods of uncertainty. There’s also one potential silver lining: there has been greater divergence in economies recently – most notably in economic growth and inflation. If this trend continues, it could make it easier to have diversification within portfolios.

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Blackfinch Asset Management – Monthly Market Moves

Please see below article received from Blackfinch this morning, which provides a detailed global market update for February 2024.

February was a record-breaking month for equity market returns, with several regional indices hitting all-time highs. The key stories were in the US and Japan, with US returns driven by the darling of the Artificial Intelligence (AI) world, Nvidia, boosting sentiment across the market. Japan boasted an impressive corporate earnings season, as well as stark improvements in corporate governance, which helped Japan’s largest index burst through the ceiling set at the end of 1989, when Tokyo real estate was the most valuable on the planet. On the economic front, the UK officially moved into its long-expected technical recession, which sparked some concern for domestic investors. Disappointing inflation data in the US was
largely shrugged off in equity markets by the sheer excitement of AI, as well as the US economy continuing its strong economic growth trend.

Bank of England hints that interest rate cuts are coming…
but not quite yet

• The UK officially moved into a technical recession – defined as two
consecutive quarters of falling national output – at the end of 2023.
The Office for National Statistics (ONS) reported that UK gross domestic
product (GDP) declined by a larger-than-expected 0.3% in the fourth
quarter, following a fall of 0.1% in the third quarter. Although this caused
some concern for local investors, Bank of England (BoE) Governor Andrew
Bailey said he expects this recession will be “shallow” and short-lived.

• UK consumer price index (CPI) inflation remained at 4% in January.
Economists had expected a small increase to 4.2%, meaning it was a softer
reading than predicted and reaffirmed hopes of meeting the BoE’s 2% target.

• The BoE’s decision to maintain interest rates at 5.25% in February, a 16-year high, was no surprise. However, the decision wasn’t unanimous, as varying Monetary Policy Committee (MPC) members voted in different directions, with some preferring to increase the rate by 0.25% and another member opting to reduce it by 0.25%.

• The ONS reported that annual growth in regular earnings, excluding
bonuses, was 6.2% in the fourth quarter of 2023, while pay rises, including
bonuses, reached 5.8%. Economists had expected 6.0% and 5.6%,
respectively. A strong jobs market and wage growth will likely make the
MPC apprehensive about cutting interest rates too soon.

China fighting an uphill battle to economic recovery

• China continued to fight deflationary pressures in January, adding to
uncertainty surrounding its economic outlook, with prices having fallen
at the fastest rate in 15 years. CPI inflation declined 0.8% year-on-year
for January, which marked the fourth straight month of declines and
the sharpest contraction since 2009, after the Global Financial Crisis.
The inflation rate was dragged down by falling food prices, which
dropped by 5.9% year-on-year.

• China did report some encouraging economic data in terms of increased
revenue. Revenue from tourism during the Lunar New Year holiday surged
47.3% year-on-year and surpassed 2019 levels. Domestic tourism spending
hit 632.7bn yuan (£69.7bn), according to government figures, thanks to a
domestic travel boom amid a longer-than-usual break.

• However, we are still seeing a continued trend that foreign direct investment (FDI) into China last year increased by the lowest amount since the early 1990s. China’s direct investment liabilities, a broad measure of FDI, rose by $33bn in 2023, down 81.7% from 2022, according to the State
Administration of Foreign Exchange.

US economy proves too strong for its own good, quashing hopes
of earlier interest rate cuts

• US CPI inflation declined to 3.1% in January, down from 3.4% in December,
but higher than the 2.9% reading economists expected. This was a
disappointing figure at the headline level.

• However, the Personal Consumption Expenditures (PCE) index – the
preferred inflation measure of the Federal Reserve (Fed) – increased by
2.4% in the year to January, down from 2.6% in December. This would have
helped reassure the Fed that inflationary pressures were easing. The core
PCE index, excluding food and energy costs, showed prices rose 2.8% in
the year to January, down from 2.9% a month earlier.

• Despite the positive PCE inflation news, the US jobs market appeared far
too strong for the Fed to consider cutting interest rates just yet. The US
Labor Department reported that employers added 353k new jobs in January taking the unemployment rate to 3.7%, still close to the 50-year low.

• The most disconcerting feature of the jobs report for the Fed was the
strength in worker pay, as average hourly earnings jumped by a surprisingly strong 0.6%. That was the fastest increase in two years, lifting the year-over-year increase to 4.5% from 4.3% in December. This is not the direction the Fed wants to see, as it views taming wages as a critical step in wrestling inflation down to its target.


As mentioned, it paid dividends to be an equity investor in February. Although economic data across the globe was somewhat mixed, investors in Western markets were again swept up in the AI craze. China was the surprise package for the month, however, with indices rallying due to more targeted stimulus measures from the government. Despite this, Chinese equities remain at 20+ year lows against broader equities. The mood music in the region is still gloomy, as overseas investment expanded at the slowest pace in 30 years in 2023, although GDP did grow by 5%.

Turning to bonds, the outlook turned negative on rate cuts, with the yield on the ten-year UK government bond (gilt) rising from 3.79% at the start of February to 4.12% by the end of the month, and with the ten-year US Treasury yield increasing from 3.92% to finish the month paying 4.26%. The outlook for high-quality investment grade bonds continued to improve, as February saw over $150bn in new issuance in the US, a record-breaking amount.

Away from equities and bonds, property and infrastructure both fell in value for the month. These assets are particularly sensitive to shifts in interest rate expectations and fell victim to the conclusion from the market that interest rate cuts may not come as quickly as previously hoped, especially in the US.

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The Daily Update | PCE In Line / NYCB Spooks Markets Again

Please see below article received from EPIC Investment Partners this morning, which reports on the latest economic data from the US.

The Fed’s preferred inflation gauge, the personal consumption expenditure deflator (PCE) was broadly in-line with expectations in February, increasing 0.3%mom, slightly ahead of December’s 0.2% print. On an annual basis, PCE was 2.4%, in-line with expectations and 0.2% below the previous reading.  

The core print was along the same lines, coming in 0.4%mom, versus a prior of 0.2%, while the annual value ticked down a tenth to 2.8%, mainly due to base effects. Both the numbers were in-line with market expectations.   

Stronger data, including inflation, has very much been the theme so far this year. However, the Fed along with the market will be looking to see if this has been a “fluke”, or a new trend. Fed speakers Bostic, Goolsbee, and Daly all seemingly unperturbed and continued to tow the party line.  

Goolsbee said we shouldn’t extrapolate one month’s data, Bostic said it shows that the path to target inflation will have bumps along the way, and the dovish Daly repeated that she advocates for policy rate cuts ahead of reaching the 2% target. Additionally, the historically more hawkish Mester reiterated William’s message yesterday, stating that three cuts for 2024 “still sounds about right”.   

Meanwhile, New York Community Bancorp (NYCB) was again in the headlines yesterday after they released several announcements that spooked the market, who were already on edge since the lender reported its exposure to commercial real estate (CRE).  

Regulatory filings from its management “identified material weaknesses in the Company’s internal controls related to internal loan review.” The bank attributed the problems to “ineffective oversight, risk assessment and monitoring activities”.  

The news reignited the controversy that began in January when the company, a significant lender for New York apartments and CRE, announced it was amassing cash to safeguard against possible loan issues. The stock fell over 26% in after-hours trading, on top of the more than 53% it has already lost this year.  

As we have said before, US banks alone hold about USD2.7tn in commercial real estate debt, of which a significant percentage is now underwater.  

We reiterate, this could be a canary in the coal mine that we will be keeping a very close eye on. 

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The Daily Update | FOMC Minutes and Icelandic Authors

Please see below article received from EPIC Investment Partners this morning, which reviews the FOMC minutes from the January 30/31 meeting.

The FOMC minutes from the January 30-31 meeting revealed little on monetary policy direction. The minutes reiterated the Fed’s intention to wait for “greater confidence” in inflation moving sustainably towards a 2% target and emphasised the need for patience. Only a “couple” of officials seemed inclined to cut rates earlier due to the current restrictive policy stance compared to their colleagues.  

The minutes stated: “Most participants recognised the dangers of easing policy too hastily and stressed the need to carefully evaluate incoming data to determine if inflation is consistently moving towards 2%. However, a couple of participants highlighted the economic risks of maintaining a too restrictive policy for an extended period”. This was echoed in the press conference when Powell was asked about the possibility of a March cut: “that’s probably not the most likely case or what we would call the base case.”  

Furthermore, the minutes highlighted the progress towards the Fed’s dual mandate but cautioned that economic uncertainty could jeopardise this progress. “Members judged the risks to achieving the Committee’s employment and inflation goals were moving into better balance. Members considered the economic outlook uncertain and concurred that they were highly attentive to inflation risks.”  

Regarding inflation, the minutes detailed several risks, noting that the committee “saw inflation’s upside risks as diminished” but observed that inflation remained above the Committee’s longer-term goal. Some participants worried that progress towards price stability might halt, especially if demand increased or the healing of the supply side slowed more than anticipated. However, they also noted downside risks to inflation and economic activity, including geopolitical risks that could significantly reduce demand, potential adverse effects from slower growth in certain foreign economies, the risk of prolonged restrictive financial conditions, or the impact of weaker household balance sheets on consumption deceleration more than expected.   

Lastly, if you have ever thought about writing a book and want to be around like-minded people, then Iceland is your place. About one in 10 Icelanders publishes a book in their lifetime; by comparison, in the US only one in 5,000 have. The average Icelander reads more than two books a month. Remarkably, a blockbuster title can sell as many as 14,000 hardback copies in a country with a population of just 375,000. One reason for the prolific writing could be the country’s ancient storytelling tradition, going back some 800 years to the Icelandic sagas.   

Or it could just be needing something to do during those long 21-hour winter nights.   

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