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The Daily Update | Yellen’s Soft Landing / UK House Prices Defy Gravity

Please see below article received from EPIC Investment Partners this morning, which provides an update on both US and UK markets.

Yesterday, Janet Yellen expressed confidence that the US economy will not require significant hikes from the current level to curb inflation, believing the economy is on a path towards achieving the Fed’s desired soft landing with the unemployment rate averting a sharp increase. 

“Signs are very good that we’ll achieve a soft landing, with unemployment stabilising more or less where it is, or in the general vicinity,” Yellen stated, speaking to reporters following a speech at a lithium processing plant in North Carolina. 

Yellen added she doesn’t believe the Federal Reserve will need to push as harshly in lowering inflation as it has done in past instances when price rises ran out of control. “Those recessions you’ve talked about were times when the Fed, similar to now, was tightening policy to bring down inflation, but found it necessary to tighten so much that they flipped the economy into a recession,” Yellen said. Adding: “Perhaps it was necessary in order to reduce inflation and expectations of inflation that became ingrained, but we don’t need that now.” 

Helping cement that view were the PCE deflator figures, released yesterday. The Fed’s preferred metric for assessing progress on its inflation mandate showed core softening to 0.2%mom, in-line with expectations and below last month’s 0.3% print. Moreover, the measure eased from 3.7%yoy, in October, to 3.5%yoy last month, again in-line with the market consensus.  

Here in the UK, we also see the housing market continuing to defy forecasts by some of a sharp correction. House prices climbed for a third straight month according to Nationwide, as a lack of properties and lower borrowing costs underpinned the market. House prices rose by 0.2% in November, against an expectation for a drop of 0.4%.  

Following the release, Robert Gardner, the Nationwide’s Chief Economist, said: “There has been a significant change in market expectations for the future path of Bank Rate in recent months which, if sustained, could provide much needed support for housing market activity”. 

House prices are roughly 5.5% lower from where they peaked in August 2022. Many had predicted a 10% fall this year with some outliers going for 20%, even 25% lower. The average cost of a house in the UK is now just over £258,500.  

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Markets in a Minute – Markets respond to mixed economic data

Please see below article received from Brewin Dolphin yesterday afternoon, which provides a global market update as we approach the festive season.

Markets were mixed in a week that saw the release of differing economic data.

The UK’s FTSE 100 dropped 0.1% despite growing consumer confidence and the autumn statement containing a number of measures to stimulate business investment and economic growth.

Over in the US, markets saw a shorter trading week due to the Thanksgiving holiday. The S&P 500 and Dow added 0.3% and 0.7%, respectively, rallying against disappointing economic data – including a drop in durable goods and weak purchasing managers’ index (PMI) data. In contrast, the tech-heavy Nasdaq fell 0.2%.

In Asia, Japan’s Nikkei 225 added 0.7%. Meanwhile, China’s Shanghai Composite lost 0.9% due to continuing worries about the country’s economic recovery. Hong Kong’s Hang Seng lost 1.2%.

Chinese economy dents investor sentiment

Markets fell marginally on Monday (27 November) as investors reacted to news that industrial profit growth in China fell sharply to 2.7% year-on-year in October, down from 11.9% in September and 17.2% in August.

In the US, the Dow and S&P 500 fell 0.2%, respectively, after closing at their highest levels since early August on Friday. The Nasdaq dropped 0.1%.

In the UK, the FTSE 100 declined 0.4% as figures from the Confederation of British Industry (CBI) showed that the decline in retail sales eased in November. The CBI’s monthly retail sales balance rose to -11 in November from -36 in October. Although an improvement, this still marked the seventh consecutive monthly decrease. Despite the upcoming Christmas season, sales growth was expected to be marginally negative next month.

US durable goods fall more than predicted

The value of new orders for US durable goods (items meant to last three years or longer) fell by 5.4% to $279.4bn monthon-month in October, according to the Census Bureau.

The result fell short of economists’ predicted -3.4%. It was primarily driven by a decline in orders for transportation equipment (-14.8%), likely due to strikes at a number of factories owned by General Motors, Ford, and Chrystler parent company Stellantis. Civilian aircrafts also fell 49.6% while motor vehicle and parts declined 14.8% in October after increasing 11.6% in September. Data for September was revised down from 4.6% to 4.0%.

On an annualised basis, new orders increased 4.0% in October.

Eurozone PMI contracts

Eurozone business activity continued to contract in November, according to the HCOB flash eurozone PMI. While the index rose to 47.1 in November, the highest level in two months and an increase from 46.5 in October, it still fell below the 50.0 level that indicates growth. The main driver of the overall reduction in business activity was a decline in new orders. Both manufacturing and service sectors saw a decline in business activity.

US PMI remains flat

There was a further marginal expansion in US business activity in November, with the rate of growth in line with that seen in October. The S&P Global flash composite PMI remained at 50.7. While manufacturers saw a slower pace of expansion, this was offset by the service industry, which recorded a small uptick. The manufacturing PMI fell to 49.4 in November, down from 50.0 in October and the lowest level for three months. Meanwhile, the flash services sector PMI rose to 50.8 in November, up from 50.6 the month before.

UK consumer confidence grows

The GfK consumer confidence index, which measures how people in the UK view their personal finances and the broader economy, rose six points to -24 in November. Consumer confidence came in at -44 in November 2022.

The personal financial situation index rose three points to -16, an increase of eight points compared to November 2022. The forecast for personal finances over the next 12 months increased five points to -3, 26 points higher year-on-year.

Autumn statement measures to stimulate growth

Chancellor Jeremy Hunt delivered the autumn statement on Wednesday, with the key announcements including reductions to National Insurance and a permanent extension of the ‘full expensing’ regime for businesses. Other measures included raising the National Living Wage from £10.42 to £11.44 per hour, freezing alcohol duty, and reforms to ISAs.

There were also pledges to speed up planning applications, extend financial incentives for investment zones, and invest an additional £500m in artificial intelligence. To encourage investment in UK high-growth companies, new investment vehicles will be introduced, including a ‘growth fund’ within the British Business Bank.

The autumn statement was accompanied by the Office for Budget Responsibility’s (OBR) economic and fiscal outlook, which gave a mixed review of the UK economy.

Borrowing was £19.8bn lower than expected in the first half of the current financial year, and gross domestic product (GDP) is now forecast to expand by 0.6% this year, rather than contracting by 0.2%. The next two years are expected to be more muted, with GDP growing by 0.7% in 2024 and 1.4% in 2025, down from previous estimates of 1.8% and 2.5%, respectively. Inflation isn’t expected to return to the Bank of England’s 2% target until the second quarter of 2025.

Japanese inflation rises year-on-year

Over in Japan, the core consumer price index (CPI), which excludes fresh food, rose 2.9% year-on-year in October, according to data from the Bank of Japan (BoJ). It’s a slight increase from October’s 2.8%, but below economists’ predicted 3.0%.

The so-called core-core index, which strips away fresh food and fuel costs, rose 4.0% year-on-year in October, slowing from 4.2% in September. It is the seventh consecutive month the index has stayed above 4.0%.

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The Daily Update – Argentina’s Electorate Roll The Dice

Please see below article received by EPIC Investment Partners, which provides a political update following Argentina’s presidential election.

Argentina rolled the dice on Sunday by electing the right-wing libertarian outsider Javier Milei as its new president. The country, which is grappling with triple-digit inflation, a looming recession, and rising poverty, turned to Milei, who rode a wave of voter anger towards the political mainstream with his radical views to address the country’s economic challenges. 

Milei landed nearly 56% of the votes, while his rival, Peronist Economy Minister Sergio Massa, conceded with 44%. Massa acknowledged the unexpected outcome and extended congratulations to Milei, emphasising that the responsibility of providing certainty now lies with the newly elected president. 

Milei, advocating for economic shock therapy, plans to implement drastic measures such as shutting down the central bank, abandoning the peso for the US dollar and implementing huge spending cuts. These reforms, though painful, resonated with voters frustrated by the decades of economic mismanagement by the main political parties.  

However, the magnitude of the challenges faced by Milei are enormous. He must contend with empty government and central bank coffers, a USD44bn debt program with the International Monetary Fund, inflation raging at nearly 150%, and a complex web of capital controls. 

The International Monetary Fund (IMF) officials have meanwhile called on the next government to swiftly reset the economy, emphasising that there’s no time for gradual policies. IMF Managing Director Kristalina Georgieva congratulated Milei on social media in the Fund’s first official comments since the election, saying “we look forward to working closely with him and his administration.” 

Whilst some voters viewed the election of the 53-year-old economist and former TV pundit as a choice between the “lesser of two evils”, the fear of Milei’s tough economic measures was less than the anger at Massa and his Peronist party for the deep economic crisis that has left Argentina heavily indebted and unable to access global credit markets. 

Milei garnered significant support from the younger generation, who have witnessed their country endure successive crises. The victory reflects a desire for change among those who see Milei as a break from the past. 

However, Milei’s rise does introduce uncertainty to Argentina’s economic trajectory, political dynamics, and foreign policy. His criticism of China and Brazil, refusal to engage with “communists”, and emphasis on stronger US ties suggest a shift in international relations. He is also staunchly anti-abortion, favours looser gun laws and is not afraid to criticise the Argentine Pope Francis. He used to carry a chainsaw as a symbol of his planned cuts, however, shelved the idea in recent weeks to help boost his moderate image. 

While Milei’s alliance with conservatives boosted his support after the first-round vote in October, the fragmented Congress and absence of a majority bloc pose challenges. Milei will need support from various factions to advance his legislative agenda. Additionally, his coalition lacks regional governors or mayors, which may moderate some of his more radical proposals. 

The road ahead for Milei is fraught with obstacles, and the patience of long-suffering voters may be limited. However, after years of political ineptitude, the old adage “better the devil you know” does not cut the mustard for the South American country anymore.  

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Markets in a Minute – Stocks rally on interest rate optimism

Please see below article received from Brewin Dolphin yesterday afternoon, which provides a positive global market update.

Global equities rallied last week on expectations that interest rates may have finally reached their peak.

The S&P 500 rose 4.6%, its strongest weekly gain in almost a year, after the Federal Reserve indicated that the recent increase in long-term Treasury yields could mean that a further rate hike is not required. The Dow added 3.4% and the Nasdaq surged 5.4%.

In Europe, the Stoxx 600 and Germany’s Dax both added around three percentage points after eurozone inflation fell to its lowest level since July 2021. The FTSE 100 gained 1.2% as the Bank of England voted to keep interest rates unchanged.

The positive sentiment carried over to Asia, where Japan’s Nikkei 225 advanced 4.1% and China’s Shanghai Composite rose 0.3% despite concerns about China’s economy.

Eurozone business activity contracts further

European stock markets slipped into the red on Monday (6 November) as investors took profits after five-consecutive days of gains and data painted a gloomy picture of the eurozone economy. The latest HCOB eurozone purchasing managers’ index (PMI) showed the rate of decrease in business activity accelerated in October. The index fell to a 35-month low of 46.5 in October, down from 47.2 in September. New orders for goods and services fell at the quickest pace since May 2020. Over in Asia, South Korea’s Kospi surged 5.7% on Monday after the country re-imposed a ban on short selling.

UK and European indices were flat at the start of trading on Tuesday as investors analysed weaker-than-expected economic data from Germany and China. German industrial production slumped 1.4% in September, driven by a 5% decline in automotive industry production. Chinese exports dropped 6.4% year-on-year in October, much worse than the 3.5% decline expected by analysts. Imports unexpectedly rose by 3.0% over the same period.

Fed delivers dovish policy statement

Last week saw the US Federal Reserve vote to leave interest rates unchanged, as widely expected. The November meeting did not contain any new economic projections, which meant that all eyes were on the postmeeting press conference.

During the conference, Federal Reserve chair Jerome Powell noted that the recent surge in long-term US bond yields and mortgage rates had done some of the Fed’s job for it. He said Fed officials will be watching the effects of higher yields as they consider whether to hike rates again. Powell also said the Fed has come far in terms of its tightening campaign and that it takes time for higher interest rates to impact the real economy.

The comments were interpreted to mean that interest rates may have reached their peak, which drove steep declines in bond yields across different maturities.

US labour market cools

The drop in bond yields was further fuelled by a weakerthan-expected nonfarm payrolls report, released on Friday. Nonfarm payrolls increased by just 150,000 in October, while job growth in August and September was revised down by 101,000. Manufacturing was a notable area of weakness, with the sector experiencing net job losses of 35,000 last month. The Bureau of Labor Statistics said this reflected a decline of 33,000 in motor vehicles and parts that was largely due to strike activity. Average hourly earnings increased by 0.2% month-on-month, the lowest reading since February 2022, and the unemployment rate ticked up to 3.9%.

Although the data suggests the economy is slowing, markets reacted positively because it added to the conviction that the Fed will abandon its plan of one more rate hike in December.

BoE holds base rate at 5.25%

Here in the UK, the Bank of England (BoE) chose to leave interest rates unchanged for the second time in a row at 5.25%. The vote was 6-3, with three of the nine Monetary Policy Committee members favouring another 25-basis point increase.

While the BoE’s hiking campaign might have come to an end, the Bank went out of its way to flag that monetary policy will remain restrictive for some time as inflation and wage growth remain elevated. BoE governor Andrew Bailey said it was “much too early to be thinking about rate cuts”, adding: “We will keep interest rates high enough for long enough to make sure we get inflation all the way back to the 2% target.”

The most recent year-on-year inflation figure was 6.7%. The BoE expects inflation to fall sharply in the coming months, remain at around 3% next year, and drop below the 2% target at the end of 2025 – later than previously forecast. It also expects the UK economy to grow by 0.1% for the rest of this year and remain flat in 2024.

Japan approves stimulus package

Over in Asia, the Japanese government approved a $113bn stimulus package that aims to boost growth and help households cope with the rising cost of living. According to Reuters, the package includes temporary cuts to income and residential taxes, payouts to lowincome households, and subsidies to curb petrol and utility bills. The government estimates that the plan will boost Japan’s gross domestic product (GDP) by around 1.2% on average over the next three years.

Last week also saw the Bank of Japan (BoJ) announce a further relaxation of its yield curve control policy. The BoJ said the 1.0% ceiling for ten-year Japanese government bond yields will now be regarded as a reference rather than a strict cap on rates.

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The Daily Update: BoE Stays Put / Nonfarm Payrolls / Billionaire to Broke

Please see below article received from EPIC Investment Partners this morning, which coversthe Bank of England’s stance on keeping the base rate at 5.25%.

As expected, the Bank of England followed the Fed, voting 6-3 in favour of keeping the base rate at 5.25%, with a warning that monetary policy will likely need to stay tight for an “extended period of time”. Andrew Bailey, the Governor of the central bank, warned that whilst progress had been made in the fight against inflation, it was still too high and there was “absolutely no room for complacency”. 

“We will keep interest rates high enough for long enough to make sure we get inflation all the way back to the 2% target. We will be watching closely to see if further increases in interest rates are needed, but even if they are not needed, it is much too early to be thinking about rate cuts,” Bailey said, adding that the committee would rely on future data to balance the risks “between doing too little and doing too much”. 

In its latest Monetary Policy Report released with the decision, the committee acknowledged that inflation has fallen below the earlier projections made in August. The bank’s revised outlook now sees the consumer price index (CPI) at around 4.75% in Q4 of 2023, followed by a fall to about 4.5% in Q1 of the next year and a further drop down to 3.75% in Q2. 

As for the UK’s GDP, it is now expected to have stagnated in Q3 2023, which is a weaker performance compared to the MPC’s August forecasts. The GDP is now projected to exhibit only 0.1% growth in the fourth quarter, also falling short of the previous expectations from August. 

This was the first MPC that former US Federal Reserve Chair Ben Bernanke attended, as part of his review into the Old Lady’s forecasts and communications. The BoE appointed Bernanke in July to examine the forecast process after heavy criticism from politicians and some economists for underestimating the threat inflation posed. His review is focused on the lessons to be learned for future forecasts “during times of significant uncertainty.” It will not pass judgment on past policy decisions.

Today sees the penultimate Nonfarm Payrolls numbers for 2023. The market is going for +180k lower than October’s bumper +336k with an unemployment rate of 3.8%, hourly earnings of 0.3% and a participation rate of 62.8%. 

Lastly, how the mighty have fallen. “Crypto King” Sam Bankman-Fried had gone from being (a supposedly) multi-billionaire to a broke, convicted fraudster who faces decades behind bars. The 31-year-old former CEO of FTX was found guilty by a jury on all seven charges of fraud and conspiracy against him. The sentencing for these charges, which carry up to 115 years in prison, is scheduled for March 2024. 

A jury took just over four hours yesterday, including dinner, to conclude that Bankman-Fried stole USD 8 billion in customer funds from his crypto exchange FTX to fund risky investments, political contributions, and luxury real estate.

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The Daily Update: The Peasful Revolution: A Toast to Sustainability

Please see below article received from EPIC Investment Partners, which provides a more light-hearted commentary on sustainability.

For the past decade, avocados have been the quintessential symbol of the millennial generation, with many claiming that avocados are a sustainable superfood, when the reality is that eating them has serious environmental consequences.

However, it seems that their era of dominance might be drawing to a close, as a more humble, cost-effective, and home-grown alternative gains traction. Mushy (or smashed) peas on toast is increasingly making its presence felt in restaurants across the UK, offering an alternative to the beloved, yet pricey avocado. This shift is being largely driven by a growing awareness of food and environmental sustainability among restaurants.

As we wrote in a Daily Update last year, avocados can be grown across the world. However, the primary producers of avocados remain in South and Central America, in part due to the environmental specificity of growing the fruit. Avocado production is massively water-intensive, roughly 70 litres per fruit, more than 12 times as much as it takes to grow a tomato in your greenhouse. The UK’s imports of avocados contain over 25 million cubic metres annually of virtual water – equivalent to 10,000 Olympic-sized swimming pools. With global temperatures rising and water becoming scarce, this has a serious impact on some local communities who do not have access to drinking water.

Then there’s the transportation. A Mexican avocado will have to travel over 5500 miles to reach the UK. Given the distances, fruit is picked before it is ripe and shipped in temperature-controlled storage, which, of course, is very energy intensive.

In contrast, peas present a logical replacement option. The UK is 90% self-sufficient when it comes to pea production, with 700 growers collectively yielding 160,000 tonnes of frozen peas annually, all delivered with considerably fewer “food miles”. 

Last month, Google searches for “peas on toast” increased by 133% and the hashtag #peasontoast has had more than 3.3m views on TikTok. 

Avocadon’t Even Get Me Started was the most popular Daily Update of 2022.

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Weekly market commentary: US earnings season steps into gear this week

Please see below article received from Brooks Macdonald yesterday afternoon, which provides a global market update with reference to the Israel/Hamas conflict.

  • The Israel/Hamas conflict leads to significant loss of life and financial markets raise the probability of a reduction in oil supply
  • US earnings season steps into gear this week with major financials reporting alongside some important technology names
  • UK inflation data and employment data will be in focus on Tuesday and Wednesday as markets weigh UK recession risks

Last week saw equity and bond markets dominated by the events in the Middle East as well as a set of more dovish US Federal Reserve speakers. Friday saw rising concerns of a ground offensive in Gaza which saw US Treasury yields fall as investors sought safety in the US dollar and sovereign debt. The fact that this ground offensive has yet to begin has helped a cautious optimism to creep into early equity trading this week.

This week sees the US earnings season begin in earnest with a heavy focus on financials alongside a few technology heavyweights. Highlights include Tesla and Netflix which both report on Wednesday and are likely to have an outsized impact on market sentiment given their size as well as the importance of the tech focused magnificent seven to index returns this year. In terms of economic data, US retail sales will be closely watched after Friday’s University of Michigan consumer confidence surprised significantly to the downside. Also of importance will be the weekly jobless claims which have been holding up very strongly. This week is the week used for the US nonfarm payroll surveys so the jobless claims will give an insight into the US employment report in a few weeks’ time.

The UK sees the release of inflation data as well as labour market data this week. Tuesday contains the UK Claimant Count data which looks at unemployment using the % of individuals claiming unemployment benefit. This reading is lower than the wider unemployment measures as some eligible individuals do not claim unemployment benefit and some unemployed individuals are not eligible. UK unemployment is now 0.8% above the lows for the cycle and UK unemployment has increased faster than any other country in the developed world so one to watch. UK inflation meanwhile is expected to stay sticky with a 0.4% month-on-month gain at the headline level, leaving the year-on-year gain at 6.5% versus 6.7% the month prior.

Outside of the US and Europe, markets will also be paying close attention to the Japanese Consumer Price Index (CPI) release on Friday. The Bank of Japan is beginning to react to a higher inflation backdrop after struggling against deflation for decades. The 31 October central bank meeting could see the bank’s policy of yield curve control, effectively quantitative easing in the sovereign bond market, finally end. Friday’s CPI release will be a key input into that decision.

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Weekly market commentary: Q3 saw significant rises in oil prices which impacted market inflation expectations

Please see below article received from Brooks Macdonald yesterday afternoon, which provides a global market update and a review of the third quarter of 2023.

  • The 3rd quarter of 2023 saw significant rises in oil prices which impacted market inflation expectations
  • While a US government shutdown has been avoided, negotiators only have six weeks to forge a new deal
  • The US jobs report on Friday will be vitally important given the Fed’s focus on labour market data

Markets have now closed out the third quarter of 2023, a quarter which saw oil prices rise by almost one third and 10-year US Treasury yields rise by more than 0.7%. At the same time, US equities lost ground with the index off almost 5% in September. Last week was challenging for risk assets however some positive inflation data on Friday helped mitigate the negative tone with the US personal consumption expenditures (PCE) inflation measure coming in below market expectations.

Another factor driving the risk off tone from last week was fears over an imminent US government shutdown. Just before the deadline on Saturday night, a deal was agreed which will keep the government operating until mid-November. This is a stop-gap measure which allows both sides to continue negotiations without the economic impact of a temporary shutdown. The news has supported equity indices today with the US futures market pointing to gains when the market opens. The avoidance of a shutdown also means we will receive US economic data on time this week with the most important of these being the US employment report on Friday.

The US jobs report on Friday arrives as markets debate the future path of inflation given signs of slowing economic growth but still robust US labour data. The market is expecting a slowdown in the number of new jobs created with September showing gains of 156.5k new jobs compared to 187k in August. Before we get to this data, today’s Institute for Supply Management (ISM) manufacturing data, followed by the services equivalent on Wednesday, will focus market attention. The market is expecting a slight improvement in the manufacturing survey which remains stubbornly in contractionary territory, but for the pace of US services sector expansion to moderate slightly.

With much of the volatility of the last few weeks stemming from bond markets, this week’s range of central bank speakers will be closely watched. With US Treasury yields surging recently, the question is whether the US Federal Reserve (Fed) speakers look to calm the bond market and imply that there is a certain level of bond yields which the Fed is uncomfortable with. The longer yields remain at elevated levels, the higher the likelihood that ‘something breaks’ and the Fed will be keenly aware of this risk after the Silicon Valley Bank (SVB) saga earlier in the year.

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Evelyn Partners Update – August US CPI Inflation

Please see below article received from Evelyn Partners yesterday evening, which conveys their thoughts on yesterday’s US CPI inflation announcement.

What happened?

US August annual headline CPI inflation rose 3.7% (consensus: +3.6%), compared to 3.2% in July. In monthly terms, CPI rose 0.6% (consensus: +0.6%), compared to a gain of 0.2% in July.

August annual core inflation (excluding food and energy) rose 4.3% (consensus: +4.3%), versus 4.7% in July. In monthly terms, core CPI rose 0.3% (consensus: +0.2%), compared to a gain of 0.2% in July.

What does it mean?

August’s inflation report saw the monthly headline rate jump to 0.6%, its highest rate since June 2022. Much of this upward pricing pressure came from energy, with the monthly inflation rate for the sector accelerating to 5.6%. A significant driving factor of this was the recent surge in crude oil, which prompted gasoline prices at the pump to rise during August. The index for gasoline was the largest contributor to the monthly all items increase, accounting for over half the increase.

In a repeat of July, unfavourable base effects continued to put upward pressure on the annual headline rate, with a favourable 0.1% monthly reading from August 2022 dropping out of the annual comparison. In Contrast, the next two prints for September and October have more constructive starting points, so should allow room for the annual rate to begin to decelerate again from next month.

Core goods continues to remain soft with the annual rate for the sector now at 0.2%. Used cars and trucks were once again the main driver of this category with prices having fallen now for three consecutive months. However, core services remain stickier, but have been slowly decelerating. Shelter continues to put upward pressure on the index, accelerating 0.3% on the month.

Combining these core sectors paints a very promising picture for the overall core inflation rate which decelerated to 4.3% on an annual basis in August. Calculating core inflation in a 3-month annualised basis yields an encouraging 2.2%, which should instil the Fed with confidence that their battle against inflation is approaching its final stages.

Despite the labour market showing signs of easing, with non-farm payrolls adding less than 200k jobs in each of the last three months, persistent wage growth could prove problematic for this goldilocks inflation story. Average hourly earnings continue to remain resilient, gaining 4.3% for the year in August, which remains too high to be consistent with the Fed’s 2% inflation target. With real wage growth in positive territory, this could prompt an increase in consumption, rendering the Fed’s task of bringing inflation back to target more challenging.

Bottom Line

With two months of reassuring new data under their belts, the FOMC committee members should feel they have enough evidence of easing inflation and a softening labour market conditions to resist hiking at next week’s monetary policy meeting. However, with the US economy continuing to expand, it is likely the FOMC will be able to keep rates higher for longer, so rate cuts are likely not yet on the horizon.

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Brooks Macdonald Daily Investment Bulletin

Please see below article received from Brooks Macdonald this morning, which provides a succinct but detailed update on global markets.

What has happened

Equities had another poor day after investors reacted negatively to a stronger-than-expected US ISM services reading. Good economic news remains bad news for markets as it suggests a stronger economy which is likely to keep inflationary pressures sticky. Both European and US equity indices lost more than half a percent yesterday with technology shares particularly poorly impacted by the risk of higher interest rates to tackle the robust economic backdrop.


The ISM services survey not only remained in expansion territory but saw a very strong result, against market expectations for a more subdued reading. The ISM survey provides an alternative narrative to some of the more recent economic data that suggests the US economy is losing some momentum. Within the data, the employment component hit a 21-month high implying strong hiring intentions and job security, by extension the market interprets this as a tight labour market which will keep wage growth pressures high. The chances of a further Fed rate hike has come back again and is currently hovering around a 50:50 chance. The US interest rate pricing in for December 2024 hit a new high for this cycle, sitting at 4.45% as the bond market positions for a ‘higher for longer’ interest rate outcome.

European central bank

With the ECB meeting next week, European monetary policy remains in focus with bond markets now implying a one-third chance of an additional ECB interest rate cut at the upcoming meeting. A few of the more hawkish ECB speakers yesterday described the meeting as a ‘close call’ while one said that the central bank should ‘take one more step’. There was some dissent to this hawkish drumbeat however with Italy’s Visco saying that he believed ‘we are near the level where we can stop raising rates’.

What does Brooks Macdonald think

UK monetary policy was also a source of currency volatility yesterday after Bank of England Governor Bailey said that monetary policy was ‘near the top of the cycle’. This catalysed a further weakening of Sterling vs the US dollar, an exchange rate that has seen increased dollar strength since the middle of the summer. UK inflation remains stubbornly high, however the Bank of England appear keen to pose a dovish counterweight to a market narrative that sees UK interest rates remain at elevated levels well into 2025.

Index 1 Day1 Week1 MonthYTD 
MSCI AC World GBP 0.0%0.6%1.1%10.1% 
MSCI UK GBP -0.1%-0.6%-1.0%2.0% 
MSCI USA GBP -0.1%0.7%2.1%13.9% 
MSCI EMU GBP -0.1%-1.8%-2.4%8.8% 
MSCI AC Asia Pacific ex Japan GBP 0.2%1.5%-1.1%-0.9% 
MSCI Japan GBP 1.3%4.0%3.0%11.3% 
MSCI Emerging Markets GBP 0.2%1.0%-1.3%1.3% 
Bloomberg Sterling Gilts GBP -0.1%-0.9%-1.1%-5.1% 
Bloomberg Sterling Corps GBP -0.2%-0.6%-0.8%0.1% 
WTI Oil GBP 1.6%9.1%8.1%5.5% 
Dollar per Sterling -0.5%-1.7%-1.9%3.5% 
Euro per Sterling -0.5%0.1%0.7%3.2% 
MSCI PIMFA Income GBP 0.0%0.0%-0.1%3.0% 
MSCI PIMFA Balanced GBP 0.0%0.1%0.1%4.1% 
MSCI PIMFA Growth GBP 0.0%0.3%0.3%5.8% 
Index 1 Day1 Week1 MonthYTD 
MSCI AC World USD -0.6%-1.1%-1.1%13.8% 
MSCI UK USD -0.7%-2.2%-3.2%5.4% 
MSCI USA USD -0.7%-1.0%-0.1%17.7% 
MSCI EMU USD -0.7%-3.5%-4.6%12.4% 
MSCI AC Asia Pacific ex Japan USD -0.4%-0.2%-3.3%2.4% 
MSCI Japan USD 0.7%2.3%0.7%15.0% 
MSCI Emerging Markets USD -0.4%-0.7%-3.4%4.7% 
Bloomberg Sterling Gilts USD -0.6%-2.8%-3.2%-1.4% 
Bloomberg Sterling Corps USD -0.7%-2.5%-2.9%3.9% 
WTI Oil USD 1.0%7.2%5.7%9.1% 
Dollar per Sterling -0.5%-1.7%-1.9%3.5% 
Euro per Sterling -0.5%0.1%0.7%3.2% 
MSCI PIMFA Income USD -0.6%-1.7%-2.3%6.4% 
MSCI PIMFA Balanced USD -0.6%-1.6%-2.1%7.6% 
MSCI PIMFA Growth USD -0.6%-1.3%-1.9%9.4% 
   Bloomberg as at 07/09/2023. TR denotes Net Total Return    

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