News

Please see below article received from Brewin Dolphin, which discusses global market performance following the S&P 500 surpassing its previous all-time high.

Last week was a tumultuous week for investors but it ended on a bright note. Markets saw a slight pickup in volatility and a mixed performance over the week. There was plenty of news flow, enough that you might ordinarily have expected a more adverse reaction. Investor sentiment is a complex beast. There are gauges which suggest bullish sentiment amongst some shorter-term investors, but in general, institutions are gradually overcoming their risk aversion. Often when markets climb, we describe them as climbing the wall of worry, rising as investors anxiety dissipates.

One of the longstanding risks for the market is that of China invading Taiwan. The stakes would be high due to China’s 13% share of world trade, but the chances are low. The challenges faced by Russia when invading Ukraine, with which it shares a land border, would pale in comparison to an amphibious assault across the Taiwan strait, landing on largely mountainous terrain with only a handful of viable landing sites. There are more challenges too. Russia’s military was exposed as being underprepared despite having seen action over recent years. China’s military has grown but remains untested, and is perceived to be riddled with corruption and vested interests which are symptomatic of the party-controlled state. Recent months have seen evidence of a purge of the Chinese military as president Xi Jinping has found it to be unfit for purpose despite billions having been spent on modernisation.

The restructuring is believed to push back the potential date of any viable intervention in Taiwan.

Last week also marked China’s failure to make progress on the diplomatic front, with Taiwan’s incumbent president strolling to re-election, albeit with a plurality that was well down on the majority achieved by his predecessor. The Democratic Progressive Party (DPP) is a Taiwanese nationalist and anti-communist party that is opposed to stronger links with China. This year’s election was seen as an opportunity to break the DPP’s rule, but infighting amongst the opposition allowed the DPP a relatively clear path to re-election.

Chinese economy

It was an inauspicious start to last week, which contained little cheer for China. Internationally traded Chinese stocks underperformed. A release of Chinese economic data provided mixed news. An eye-catching headline was the decline in the population growth rate. This was broadly expected and simply a continuation of a trend of slowing, and now reversing, population growth, which has been in place for a decade and was accelerated by COVID. The Chinese population contracted by two million people (or just 0.15%) last year. That contraction will accelerate over the coming years.

The more timely measures of Chinese activity were reasonable, but property prices declined for the seventh straight month, and with most Chinese wealth tied up in property assets, declines in property prices have a big impact on consumer balance sheets.

The likely result is that China will step up economic stimulus after a year in which it took many piecemeal measures that failed to address weak demand. Leaks from policymakers’ deliberations suggest that China is expecting to increase the budget deficit to try and recover growth momentum.

Inflation

For the rest of the world, the very well-ingrained hopes are for monetary stimulus during 2024. But the start of the year has suggested that it might be premature to expect rate cuts. Inflation has generally been higher than forecast in December (as seen in numbers released in January).

There are explanations of course; in the UK, many forecasters failed to account for an increase in tobacco duties. We find it useful to look at a measure of the median price level, looking further than the normal weighted average price level. On this basis, UK inflation has been between 0.2% and 0.3% each month for the last seven months. That’s much more stable than the official core inflation metric, although still slightly higher than the Bank of England (BoE) would want it.

So, inflation is a little too high and the housing market showed signs of life. Rightmove’s house prices improved nationally, and the RICS (Royal Institution of Chartered Surveyors) house price balance also ticked higher. House prices will reflect the declines in expected interest rates, which have dragged five-year swap rates down and led to lower rates on mortgages. The fly in the ointment for the UK is the labour market, where the latest payrolls numbers suggest a net decline in employment. These data are volatile and subject to revision, so should be treated sceptically, but wouldn’t seem out of place with the longer trend of declining UK employment growth.

It provides a dilemma for the BoE’s Monetary Policy Committee (MPC), which is replicated around the world. If inflation is currently still too high, can it respond to tentative signs of a slowing economy?

The Red Sea

It is particularly hard to do so when inflationary pressures are rising. Shipping costs continue to rise as the Yemeni Houthi rebels attack freights navigating the Red Sea. Conflict has intensified but remains a series of proxy wars rather than a hot Middle Eastern war, which might disrupt oil supply. But there seems a reduced path of free navigation of the Suez Canal now that the US and UK launched airstrikes against the Houthis. Far from discouraging them, the rebels now see US shipping as legitimate targets. Freight rates continue to rise.

Houthis activity is facilitated by Iranian weapons supplies. The Iranians themselves launched attacks on militants in Iran and Pakistan, as well as what they claimed was a Mossad facility in Syria.

With the prospect of ongoing Houthi disruption, and a complex web of proxy conflicts taking place within the Middle East, foreign policy is likely to become a topic of the upcoming US election.

Interest rates

Around most of the world, expected interest rate cuts have been pushed back with economic news still seeming to be reasonably upbeat and inflation slightly higher than expected. A couple of weeks ago, we referenced JP Morgan CEO Jamie Dimon’s comments, which he had just made when delivering the company’s Q4 results. He said, “The US economy continues to be resilient, with consumers still spending, and markets currently expect a soft landing. It is important to note that the economy is being fuelled by large amounts of government spending and past stimulus. There is also an ongoing need for increased spending due to the green economy, the restructuring of global supply chains, higher military spending and rising healthcare costs.”

These factors would suggest that inflation and real interest rates should be higher than they have been previously, as we have discussed in the past.

Earnings season

Finally, we can check in on the US earnings season. Although only 45 companies have reported at the time of writing, the earnings season has already settled into a ratio of 80% positive earnings surprises. Regular readers will know that this is normal and not as bullish as it might seem. With the banks sounding upbeat on economic activity, it will take another view to be able to draw more meaningful conclusions from a good spread of non-bank companies.

Please check in again with us soon for more relevant content and market news.

Chloe

24/01/2024

Please see below article received from Brooks Macdonald this morning, which provides a global market update with reference to political and economical developments in the US. 

Despite an upside beat to US CPI last week, US bond markets became more confident that the Federal Reserve would cut interest rates in Q1 2024. Against this backdrop the US equity market rose almost 2%, with the index now less than half a percentage point away from its all-time high. Today will see a slow start to the new week with the US on holiday for Martin Luther King Day.

Despite US markets being closed, there will be some US headlines later today after the Iowa Caucus which will be a test of Republican appetite for a Trump nomination. Recent polls have pointed to a significant lead for Trump however commentators will be waiting to see if he can achieve 50% of the vote which would lock out any contenders regardless of vote switching as rivals drop out. Taiwanese politics will also be in focus after the presidential election which saw the incumbent Democratic Progressive Party (DPP) win with just over 40% of the vote. The DPP’s leader, William Lai Ching-te has previously been labelled a separatist by Beijing therefore markets are wary of any escalatory rhetoric in the aftermath of this win. So far neither Beijing nor the DPP have said anything to stir tensions, but this remains one to watch.

Alongside a busy week for the US earnings season, we will receive the latest US retail sales numbers for December. Given the importance of the month for sales, this will give an insight into consumer momentum as we continue through 2024. Housing data and the latest University of Michigan consumer survey will also be worth noting. In the UK, we have a large set of important data points including labour market measures on Tuesday and retail sales on Friday. The most important release will be the UK CPI report, on Wednesday, with the Bank of England hoping for continued signs of disinflation.

The Bank of England is eager to tilt towards a more balanced, or even accommodative, monetary policy. UK economic data has broadly flatlined in recent quarters, suggesting a stagnating economy. The Bank of England faces a very different backdrop to the US where economic momentum continues to feed the demand side of the inflation story. If UK CPI continues to come down the market could find the UK central bank changing its tune quite rapidly.

Please check in again with us soon for further relevant content and market news.

Chloe

16/01/2024

Please see below article received from Brewin Dolphin yesterday evening, which discusses the markets’ strong end to 2023.

The Santa rally continued broadly last week, albeit at a more moderate pace, after an ascent of over 15% on the MSCI World Index since late October.

The last trading day of the year was uneventful. The S&P 500 index fell 0.3% on the day, though miniscule compared to the +24.2% gain in 2023 and after nine consecutive weeks of gains. The Nasdaq 100 index had its best year since 1999 and the global bond market experienced its biggest twomonth gain on record.

It is a reminder that market volatility is normal, and that staying invested and strategically adding to investments during periods of market weakness can benefit portfolios over the long term.

To the markets. And as you can imagine, the festive period and the last trading week of the year is usually a quiet one. However, while western markets saw dull trading sessions, the Chinese stock market experienced some hefty moves in the positive direction.

Unpredictability continues in China

You may recall in our last Weekly Round-up, we wrote about how Chinese authorities were imposing strict regulations on the gaming industry that could challenge companies’ revenue models. This stance has since softened, which may have something to do with the $80 billion market rout led by Chinese tech companies like Tencent and Netease. Chinese authorities have now said they will listen to feedback from both companies and players on how to improve the new rules. But that wasn’t all. In what was seen as a further boost for the gaming industry, China also approved 105 domestic games.

Chinese stocks surged on the back of the change of tone. There was also a boost for investors hunting for bargains, as the mainland’s stock market is set for an unprecedented third consecutive year of declines.

So, are Chinese stocks sustainable in 2024?

We cannot rule out that Chinese stocks may go higher in the near term due to momentum and a reversal of extreme pessimism. And for those of us who are superstitious, 2024 is the year of the dragon, which is perceived to be a powerful and positive zodiac animal.

However, for long-term investors, the challenges that come with investing in China haven’t changed. Yes, the Chinese authorities may have sounded a bit more forgiving with the gaming sector, but that just shows the extreme and unpredictable nature of the policy setting. Policy risks and politics are making China borderline un-investible, with significant market volatility and high risk becoming the norm. The property market also remains a source of concern – especially the risk of a financial contagion.

China is not the only place sending mixed signals to investors though.

Japan – land of the rising rates?

Seen as the laggard of developed market central banks in terms of policy normalisation, the Bank of Japan (BOJ) has kept traders guessing on when it will exit the world’s last negative interest rates. It has been moving towards policy normalisation, notably with the near abandonment of yield curve control. With inflation in Japan at 2.8% and the official interest rate at -0.1%, higher rates seem justifiable; the BOJ just wants to be sure inflation is persistent.

The annual wage negotiations in spring will be crucial for the BOJ to gauge the inflation outlook, with speculation it will consider policy changes following the event. However, the BOJ’s governor, Kazuo Ueda, said this week they may not need to wait for the full results of the wage data, raising expectations that the BOJ may move before April. That said, the latest BOJ board minutes indicate that some members see no rush to exit its ultra-loose policy. The Japanese yen has reacted on these noises and Japanese stocks have displayed their usual negative correlation with the yen.

It is unlikely the BOJ will pre-commit or provide clearer guidance like the US Federal Reserve (the Fed). As a result, markets will have to live with confusing signals from the BOJ for the time being. For those of us choosing to ignore the more immediate market noises, the BOJ exiting negative interest rates is a matter of when, not if.

The Japanese bond markets have priced in a more than 50% chance of a rate hike by April 2024. If that happens, the BOJ will be tightening policy while other major central banks are cutting interest rates – potentially a key macro theme of policy divergence. This will have significant implications and present opportunities to market participants such as macro traders and asset allocators. One market dynamic will be via the yen and Japanese assets’ sensitivity to it. Another dynamic will be the cross-asset implications of higher Japanese government bond yields.

We watch Japanese policy developments closely because Japan is not only part of our regional exposure, but it has the potential to impact global markets. We have been paying particular attention to the possible knock-on impact of higher Japanese government bond yields on global bond yields. So far – and to our relief – the impact has been more on its currency rather global bond yields. This suggests the removal of the last anchor of low interest rates in Japan may not be an obstacle to the sustainability of a rally in global bonds in 2024.

2024 – the year of the soft landing?

At the end of the day, the elephant in the room for global assets remains the Fed. Like us, the Fed is watching the incoming data closely to decide on its next steps. In a week of limited economic data releases, we saw US data continue to broadly lean towards a soft landing. One notable data release was the personal consumption expenditure price indices, which are the Fed’s preferred measures of inflation. Both headline and core measures of the inflation gauge came in lower than expected in November. Notably, the headline Personal Consumption Expenditures Price Index has contracted by 0.1% month-on-month.

Meanwhile, US personal spending adjusted for inflation rose by 0.3% on the month, suggesting US consumers remain in spending mode going into the holiday season. US consumers have been supported by excess savings, resilient job market conditions and falling gasoline prices. For the labour market, the latest release of initial jobless claims figures hovered around the low 200,000s; a pace consistent with the low and stable unemployment rates seen in recent times. In summary, it is no surprise markets are feeling buoyant as we wave goodbye to sharp interest rate hikes (well, maybe not in Japan), expectations rise of the Fed pivoting to easier monetary policy in 2024, and US data points to a higher chance of a soft landing.

Please check in again with us soon for further relevant content and news.

Chloe

04/01/2024

Please see below article received from Evelyn Partners this afternoon, which provides an economic update as we approach Christmas and the end of 2023.

What happened?

UK November annual headline CPI inflation was reported at 3.9% (consensus: 4.4%), its lowest pace in over two years, versus 4.6% in October. In monthly terms, CPI fell 0.2% (consensus: +0.1%), compared to remaining flat at 0% in October.

November annual core CPI (excluding food, energy, alcohol and tobacco) was 5.1% (consensus: 5.6%), versus 5.7% in October. In monthly terms, core CPI was -0.3% (consensus: +0.2%), versus 0.3% in October.

What does it mean?

Today’s encouraging inflation print confirms the continuation of the downward trend in inflation. Just over a year on from headline CPI peaking at 11.1% in October 2022, it has since decelerated by over 7% points, with much of that deceleration in the headline rate coming from lower energy prices in the transport (i.e. fuel) and housing and household services (i.e. gas and electricity) categories. What was even more promising was the downward movement in core inflation, which has decelerated to its lowest rate since January 2022.

As it stands, Brent crude oil prices are now down roughly 4% for the year despite heightened geopolitical risk in the Middle East and OPEC+ output cuts. This reduces the risk of upside in retail petrol and diesel fuel prices. This weakness in oil prices has been reflected in the CPI basket for transport which decelerated by 1.7% in November. On an annual basis this segment of the economy is now exhibiting deflation, with the 12-month inflation rate turning negative.

Looking elsewhere in the divisional breakdown, goods inflation has now decelerated to 2.0% on an annual basis. While services, although slowing, remains more resilient at 6.3% for the last 12 months.

Food and non-alcoholic beverages continue to put pressure on the wallets of households, with this segment exhibiting the highest monthly inflation rate for any category at 0.3% for November. On an annual basis, prices in this segment have risen by 9.2%.

Bottom Line

With both headline and core CPI inflation slowing at a faster rate than expected in November, this should reassure policy setters at the Bank of England that high interest rates are having the desired effect of materially decelerating inflation. The Monetary Policy Committee should now be able to focus on when to cut rates, rather than if additional tightening is required. Money markets are currently expecting these interest rate cuts to materialise in the second quarter of 2024.

Please check in again with us soon for further relevant content and market news.

Chloe

20/12/2023

Please see below article received from Brewin Dolphin yesterday afternoon, which comments on US inflation figures, interest rate decisions from the Federal Reserve and Bank of England, and Chinese economic data.

The glass is very much half full for the investment world at the moment, with good news being taken as such and bad news being shrugged off.

Continuing the theme of the last two months, gains have come from the anticipation of a more benign inflationary outlook. European inflation numbers have seemed to endorse that view, dropping quite sharply over the last few months. US inflation has been more nuanced; data released last week were broadly in line with expectations, but the underlying composition of inflation could give cause for concern.

US core inflation picked up during November to a pace that would be inconsistent with the Federal Reserve meeting its inflation target. It is well understood that core inflation is heavily influenced by shelter, and shelter inflation will reflect rents and changes in house prices with a lag, representing the time it takes for tenancy agreements to be renewed. That means there should be some disinflation to come from the housing slowdown that has already occurred. More recently, the impact of housing on the consumer price index (CPI) has become clouded. Demand for new housing seems depressed but house prices have been rising for the last few months. The recent sharp decline in bond yields means that US mortgage rates have been declining, which ought to offer further support for house prices and have some knock-on effect for shelter CPI.

Moreover, the Fed looks beyond core CPI these days to try and gauge underlying price pressures. While core inflation strips out volatile food and energy prices, so-called ‘supercore’ inflation comprises services inflation excluding energy and housing. This measure should reflect the general level of inflationary pressure driven by the balance of the labour market. It accelerated slightly this month and has been running ahead of the Fed’s implied inflation target for the last four months.

Interest rates

With this backdrop, the Federal Reserve announced its latest changes to monetary policy. Broadly, policy was left unchanged, as had been universally expected, but the press conference and statement surprised the market by being more dovish than anticipated. The Fed cut its inflation expectations and raised its growth expectations for what is left of 2023. More meaningfully, it also lowered the expected interest rate at the end of 2024 to a level that implies three interest rate cuts will take place over the year. This comes at a time when the Fed is also expecting inflation to remain above target (albeit only modestly). It is surprising the Fed would endorse rate cuts whilst seeming to tolerate above target inflation. For context, market-based interest rate expectations moved lower and now imply nearly six interest rate cuts over the next twelve months.

Labour markets are the key determinant of the inflationary environment but are often observed to be lagging indicators. By the time the unemployment rate has started rising, it has often developed a momentum that makes it difficult to stop. The fear of this, at a time when Fed chairman Jerome Powell believes policy is “well into restrictive territory”, will be the motivation for this dovish tilt.

One factor that has been helpful in curtailing inflation in the US is the relatively benign performance of wages. Wage growth peaked around the turn of last year in America but has not yet done so definitively in the UK or eurozone.

Europe

That discrepancy probably motivated the Bank of England (BoE) in its more hawkish tone. Three Monetary Policy Committee (MPC) members voted to raise interest rates again, believing there was evidence of persistent inflationary pressure. They were outvoted and policy was left on hold.

The MPC decision came after the release of quite weak monthly gross domestic product (GDP) data on Wednesday, on top of Tuesday’s relatively poor labour market data. BoE governor Andrew Bailey took a more predictable line, emphasising the battle to contain inflation was not yet won and the Bank would “take the decisions necessary to get inflation all the way back to 2%”.

All central banks become heavily motivated by the latest economic data at potential turning points in interest rate cycles. The data for the UK does seem quite weak, whereas there are tentative signs of the European economy recovering some momentum. This morning saw a slight setback in the purchasing managers indices for Germany and France. This was mirrored by the UK’s ailing manufacturing sector but bucked by the UK services sector, which expanded faster for a fourth consecutive month.

Meanwhile, in the east…

A lot of data was released last week detailing the Chinese economy. There are some signs of recovery, with annual growth numbers like the 10% expansion in retail sales seeming quite healthy. This is somewhat illusory though, as China was in lockdown this time last year. The thorn in the side of the Chinese economy remains the property market. Data released today showed the continued decline in new home prices. It comes after the conclusion of the Central Economic Work Conference (CEWC). The post-meeting communique signalled some measures would come in to try to bring relief to the Chinese economy. But the promise was vague and modest, suggesting perhaps a couple of interest rate cuts and a further easing of required reserves at banks (which would enable them to lend more to the economy).

China maintained its growth target of around 5%, which sounds ambitious given the weakness of the economy. But, again, this reflects the fact that last year, China was in lockdown, and so growing 5% from that depressed level should be neither taxing nor impressive.

Please check in with us again soon for further relevant content and market news.

Chloe

20/12/2023

Please see below ‘Monday Digest’ article received from Tatton this morning, which provides a global market update as we approach Christmas.

After a gangbusters November for global capital markets, December is also currently on a positive track with trading volumes higher than November’s averages generally, suggesting quite a bit of capital is being put to work by investors.

Global bond yields have fallen yet again (meaning bond prices have risen), driven by fears of slowing global growth. Economic data has been mildly soft, while energy and commodities have been weak. European bonds outperformed following dovish noises from members of the European Central Bank (ECB).

Economic data showed soft (but not awful) purchasing manager survey indices, offset somewhat by US mixed employment data. In the US, the job agency ADP’s November employment report weakened but Friday’s US employment report surprised economists by showing 199,000 jobs were added in November, a reasonable level of job creation paired with a very surprising fall in the unemployment rate, down to 3.7% from October’s 3.9%. Still, rate expectations have fallen because the policy setters at the US Federal Reserve (Fed) appear be more focused on inflation declines than worrying about what level of unemployment is too low for comfort. Nevertheless, bond investors had expected the US unemployment rate to worsen to 4% at least and November’s data does not support the case for any rate cuts without some other factor impinging.

But it seems bonds and equities are taking more of a cue from commodities and energy.

Equities ended the week back up to recent highs, with the US ‘Magnificent Seven’ bouncing back from fears about their exposure to softer consumer demand. Stocks had seen softness despite falling bond yields, as investors started to worry that earnings prospects may be challenged, with oil sending quite a weak growth signal.

Last week, we said how OPEC’s inability to act as bloc had led to ineffective supply cuts. Since then we have seen more oil price falls, and in addition, global industrial metals and agricultural prices moved down. They are less volatile than energy prices (mainly because energy stores are always relatively low compared to ongoing use) so the lesser decline is still significant. Commodity prices are still higher than they were 2021 but the decline from mid-2022 is clear. In the past 15 years, the biggest demand swing has emanated from China and there are all sorts of signals that the world’s second-largest economy is not providing the growth leadership that the largest economy in the world has given us.

With COP28 coming to a close at the weekend, the discussions have been neither a help nor a hindrance to asset and commodity prices, nor perhaps should they be, although COP28 president Sultan Al Jaber took the opportunity to swing the debate towards responsible fossil fuel policies. Ultimately, progress on dealing with emissions will be in the enactment of detailed policy, so perhaps this is good news. The conference also turned its attention to the loss of the natural world, which many think is a good refocusing.

Moody’s weighs in to add to the Chinese gloom
November was the continuation of a miserable year in Chinese markets, where economic and policy disappointments have been the defining feature. At the time of writing, the CSI is down 12.5% year-to-date in renminbi terms, while the Hang Seng has dropped a painful 18.3%. Weaker-than-expected growth and trade – compared to admittedly high expectations – has been the root of China’s issues for some time. The government has repeatedly tried to counteract this with various support schemes or political pronouncements – to varying degrees of success.

Last week brought another headache for Beijing, after ratings agency Moody’s cut China’s credit outlook to negative. Moody’s pessimism extends to both government and private banking debt – both of which are feeling the pressure from an extended property market downturn. Moody’s has only changed its outlook on Chinese credit, and a slight downgrade is unlikely to affect China’s medium-term borrowing capacity in a big way. That said, the news is clearly not a good thing for the Communist Party government and financial stress has been worsened by the exodus of foreign investors from Chinese markets this year.

The Chinese Politburo met last week to avow a significant fiscal push next year. Among the policies being swung into action, the People’s Bank of China (PBOC) has introduced something that looks very much like quantitative easing (QE), or the buying of bonds. This policy can work in different ways but one of its possible implications is that financial market liquidity improves, which can then feed through into rises in risk asset prices. The lack of foreign equity buyers has generated much comment but the similar lack of domestic equity buyers has also been notable.

Chinese consumers are feeling pessimistic to, and for good reason: 8.5 million of them (around 1% of the total working-age population) have defaulted on debt payments since the start of the pandemic and been blacklisted by authorities. As well as severely constraining China’s domestic demand – a side of the economy Beijing avowedly wants to foster – struggling consumers cannot pay taxes, hence reducing the government’s funds and worsening its fiscal metrics. All of this puts the Party in a precarious position.

This weakness is surely one of the main reasons China has been so conciliatory toward the west in recent months. It is hard to see President Xi’s meeting with President Biden last month – his first visit to the US since early 2017 – as anything other than a big peace offering. Trade tensions between the world’s two largest economies may well continue, but they are likely to be pushed much more by Biden than Xi. For the global economy at least, conciliation is a positive. But for China, its underlying weakness seems worryingly hard to address.

Please check in again with us soon for further relevant content and news.

Happy Christmas.

Chloe

11/12/2023

Please see below article received from Brewin Dolphin yesterday evening, which looks to the future as we near the end of 2023.

After a year of interest rate hikes and renewed geopolitical uncertainty, Guy Foster, our Chief Strategist, discusses what the next 12 months could have in store for investors.

This time last year, economists were talking about the near inevitability of a recession in 2023. In the event, the economy proved more resilient than many expected. Now, forecasts are improving for 2024 as well. If anything, the last year has reminded many forecasters that predicting recessions is a task that has eluded the best-resourced central banks for decades.

So, what can we say about the possibility of a recession hitting in 2024?

Some conditions for a recession are already fulfilled. Economists believe that most developed economies are operating beyond their capacity. This jargon refers to the fact that demand currently exceeds supply. There are, for example, shortages of some of the things economies need to grow – the most obvious being skilled labour.

Under such circumstances, central banks have been trying to bring demand and supply back into balance. One such way has sought to reduce the demand by raising interest rates. The question is whether they are able to do so with enough finesse that they do not discourage spending so heavily that they inadvertently plunge the economy into a recession.

Typically, this has proven to be a task at which policymakers fail more often than they succeed.

For them to succeed, we would need to see a more gradual realignment of demand and supply in such a way that doesn’t cause a sharp increase in unemployment. Investors call this ideal scenario a ‘soft landing’ for the economy, making it distinct from the ‘hard landing’ of a recession.

Will central banks achieve a soft landing?

With all the economic forecasting resources at their disposal, and plenty of practice, we might hope that central banks could achieve the fabled soft landing through carefully calibrated interest rate increases. The fact that inflation does seem to have peaked gives hope. But these interest rate increases do not take place in a vacuum. Often, it is the combination of the stress of higher interest rates and an external shock that tips the economy over the edge.

Examples of these shocks include the bankruptcy of Lehman Brothers and the collapse of a US housing bubble that prompted a global recession during 2008 and 2009; the collapse of the speculative bubble in technology stocks at the start of the millennium; and, in the early 1990s, the first Gulf War, which saw a sharp increase in oil prices.

So in terms of predicting whether the UK, the US or the world will enter a recession next year, we can say it is possible. In the end, however, it will likely depend upon whether the economy is subjected to some shocks which, by their nature, are unpredictable. It’s often appropriate to paraphrase former US defence secretary Donald Rumsfeld: “There are things we know we know, there are things we know we don’t know, and there are things we don’t know that we don’t know.” This is useful structure for considering the risk in economic forecasting.

What ‘we know we know’ is that the labour market is tight and interest rates have increased substantially, which raises the risk of a recession. However, the fact that inflation is falling and that recent declines in the oil price give households more flexibility over their discretionary spending makes the soft landing scenario more likely.

The things that ‘we know we don’t know’ would include whether tensions in the Middle East could disrupt oil supply and cause a price spike of the kind that has shocked the economy into recessions in the past.

But above all, there are the things ‘we don’t know that we don’t know’. As with every year, we have to acknowledge that things could happen that will not have been predicted in this or any other outlook piece. And it is that uncertainty which has historically made the forecasting of recessions a very challenging task.

Beyond the likelihood of a potential recession, we should also consider the potential severity of one. The recession taking place as Covid struck was by far the deepest in modern times (fortunately, it was also the briefest). Prior to that, the recession accompanying the financial crisis was the deepest since the early 1900s. The bubble in real estate was symptomatic of very high levels of consumer indebtedness, which ultimately caused such a severe recession. Households then spent the following decade reducing their reliance on debt and, in aggregate, are in relatively robust financial health.

What impact could upcoming elections have?

The main concern for the coming year is not consumer indebtedness, but government indebtedness – both in terms of the risk that it could cause a shock and because of the constraints that it places governments under.

For many years, there has been anxiety over the seemingly inexorable march upwards in government debt to gross domestic product (GDP) ratios. GDP is a measure of the money that gets earned within an economy and, as such, represents an upper limit on the amount that can be used to derive government revenues (what can be taxed).

The outlook for public finances will be a further ‘known unknown’ because there are a lot of elections taking place during 2024. The two obvious ones will be a probable election in the UK (which could theoretically be held any time until January 2025) and November’s election in the US.

The UK endured a brush with fiscal mortality following the mini-budget of September 2022. Even prior to that, there was widespread acceptance by both major political parties that fiscal policy should be constrained by a robust fiscal framework with independent verification of government financial projections (from the Office for Budget Responsibility). Whilst both parties will attempt to thread the needle between appearing not to be neglectful of public services and giving hope that the historically high tax burden can be reduced, it seems unlikely that either will offer particularly bold policies to do so. Labour (which currently enjoys a commanding lead in the polls) has adopted a more centrist approach after an unsuccessful lurch to the left between 2015 and 2020. The nuance upon which the election will be fought will not be revealed until a date is set, but is likely to focus on distributional and social rather than major economic differences.

In the US, it seems likely that November’s election will be contested between president Joe Biden and former president Donald Trump. Neither seems likely to strike an austere tone on the public finances, and it is possible that the bond market could react should it appear likely that Trump will win. This is because as the Republican candidate, he has a greater chance of controlling the two houses of Congress, which set budgets, than his likely opponent. Control of the Senate, where only a third of seats are contested each election, seems very difficult for the Democrats to retain. If Congress is divided, then financial policies tend to be restrained by partisanship.

What is the overall outlook for investments?

Whilst many will look to the coming election season with dread, the bright news from an investment perspective is that US election years have historically produced quite good returns. Brighter still are the relatively high yields on bonds, which now promise better returns in future years than they had done for a decade or more. These yields reflect current high interest rates, which bring the likelihood of interest rate cuts over the coming year, either to prevent a recession or at least reduce its seriousness. These are tailwinds for the equity markets.

Please check in again with us shortly for further relevant content and market news.

Chloe

08/12/2023

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.  

Please check in again with us shortly for further relevant content and news.

Chloe

01/12/2023

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%.

Please check in again with us shortly for further relevant content and news.

Chloe

29/11/2023

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.  

Please check in again with us soon for further relevant content and market news.

Chloe

21/11/2023