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Please see below article received from Brooks Macdonald yesterday afternoon, which provides a detailed market commentary as we head into August.

• Better inflation data buoys hopes that the US economy might be able to pull-off a soft landing
• Bank of Japan intervenes to dampen government bond yield moves
• Company Q2 earnings reports reach the half-way point, so far so good
• Another interest rate hike expected from the Bank of England later this week

Better inflation data buoys hopes that the US economy might be able to pull-off a soft landing

Markets finished last week in positive mood, as softer US inflation data increasingly suggested the economy might be able to pull-off a so-called ‘soft’ landing (where economic growth slows but avoids recession). Buoying sentiment, both US personal consumption prices and employment costs saw annual gains come in a shade weaker than expected. Looking forward, this week is a relatively busy one for data. It starts with Eurozone consumer inflation later this morning, followed by the US Federal Reserve’s (Fed) latest Senior Loan Officer Opinion Survey on bank lending out later today. Central bank decisions are due from the Reserve Bank of Australia on Tuesday and the Bank of England (BoE) on Thursday. Elsewhere, after last week’s better US Gross Domestic Product (GDP) Q2 print, this week we get some US purchasing manager survey data on manufacturing and services on Tuesday and Thursday respectively. Wrapping up the week, the US monthly non-farm jobs report is out on Friday, where the consensus is looking for 200,000 jobs added in July.

Bank of Japan intervenes to dampen government bond yield moves

After the Bank of Japan (BoJ) surprised markets last Friday by effectively loosening its grip on its yield-curve-control monetary policy, this morning we have been reminded that there still limits to how far the BoJ wants to travel for now. Earlier today the BoJ announced an unscheduled Japanese Government Bond (JGB) purchase operation, spending 300bn yen (around $2.1bn) to buy 5-to-10-year bonds at market yields. This looks consistent with BoJ Governor Kazuo Ueda’s comments last week that the BoJ was ‘not ready’ to allow yields to move freely. It is also interesting that in last week’s latest BoJ forecasts, while it raised its median estimate for fiscal 2023 core consumer inflation (Consumer Price Index (CPI) all items less fresh food and energy) to 3.2% from 2.5% previously, there was no change to fiscal 2024 at 1.7% or fiscal 2025 at 1.8%, which both sit below the BoJ’s 2% inflation target.

Company Q2 earnings reports reach the half-way point, so far so good

We are now half-way through the US company results season, with 51% of US large-market-capitalised companies having reported Q2 results. According to the latest Factset ‘earnings insight’ report, 80% have reported Earnings Per Share (EPS) above consensus, which is above the 10-year average of 73%. Revenues are also so far proving resilient, with 64% of companies reporting revenues above consensus, just about better than the 10-year average of 63%. Meanwhile the longer-term earnings outlook appears to continue to push-back against wider recession fears, with calendar year-on-year earnings growth expected to rise from a flat +0.4% this year, to +12.6% in 2024. Markets are discounting machines, calibrating expected future outcomes into asset prices today. With a strong year-on-year pickup in earnings growth expected next year, that is helping to give oxygen to markets currently.

Another interest rate hike expected from the Bank of England later this week

After hikes from both the Fed and the European Central Bank last week, the BoE is expected to follow suit on Thursday. It is still a bit of a close call however between a 25 basis points (bp) or 50bp hike, The BoE will be weighing up strong wage data on the one hand, but against this, there was the better-than-expected consumer inflation data. On balance, markets expect the BoE to hike by 25bps (which would take interest rates up from 5.00% currently, to 5.25%, which would be the BoE’s 14th consecutive hike in this cycle) but reiterate data-dependency for its forward guidance.

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

Chloe

01/08/2023

Please see below article received from Brooks Macdonald this morning, which concentrates on economic developments in the US and the consequent effects on markets.

• We now enter the second half of the calendar year after a strong Q1 and more mixed Q2 2023.
• Soft PCE data along with consumer spending data suggest price pressures may be fading which helped catalyse the week end rally in markets.
• All eyes on US employment data at the end of the week which will provide further insight to the inflationary outlook. 

We now enter the second half of the calendar year after a strong Q1 and more mixed Q2 2023.

The first half of the year, proved to be a strong half for financial markets however it is fairer to say that Q1 was strong and Q2 somewhat more mixed. In terms of the 2023 leader boards, the US technology sector has surged ahead, driven by the mega-cap names and hopes of a generative Artificial Intelligence (AI) revolution. The half-year was capped off by a strong week for equities, with the rally particularly strong on Friday after Friday’s personal spending and Personal Consumption Expenditures (PCE) data suggested that inflation may be moderating in the United States.

Soft PCE data along with consumer spending data suggest price pressures may be fading which helped catalyse the week end rally in markets.

The PCE inflation index for May came in line with market expectations, at 3.8% year-on-year however the core inflation number missed a 4.7% estimate, coming in at 4.6%. The month-on-month increase in US core services inflation was the smallest since June 2022 which helped catalyse the week end rally in markets. Lastly, consumer spending was softer than the market expected which may suggest that some of the demand-side impetus behind the uptick in prices may be fading.

All eyes on US employment data at the end of the week which will provide further insight to the inflationary outlook.

This week’s focus will be on the non-farm payroll report which will give insights into the US employment picture. The headline number of new jobs created is expected to have slowed from 339k in May to 215k in June with average hourly earnings and the length of the workweek expected to be unchanged. While the headline number is expected to ease from the last reading, we are still some way off a level that would imply an imminent recession. A resilient employment report sits in contrast to some of the other lead indicators which are pointing to a slowdown however the outsized strength of the labour market has been a key driver of market inflation expectations so far this year. The Institute of Supply Management (ISM) manufacturing data is out today and is expected to show the US manufacturing sector still in contraction after turning negative in November last year.

With core inflation easing slightly in the US, and the manufacturing sector in clear contraction, the market is awaiting a change in the US employment situation that will bring some of the inflation readings down more decisively. If we see a smaller-than-expected number of new jobs created last month, there will be an expectation that this will filter into weaker hourly earnings in future months which will weigh on consumption as the second half of the year develops.

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

Chloe

04/07/2023

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday afternoon, which provides a succinct but detailed global market and economic update.

Most major stock markets rose last week after the US Federal Reserve refrained from raising interest rates in June.

In the US, the S&P 500 enjoyed its longest stretch of daily gains since November 2021 and finished the week up 2.6%. The Nasdaq and the Dow added 3.3% and 1.3%, respectively, after a notable easing of US inflation also helped to boost investor sentiment.

Stock markets in Europe also rallied, with the Stoxx 600 and Germany’s Dax up 1.5% and 2.6%, respectively. The FTSE 100 gained 1.1% following a rebound in UK gross domestic product (GDP) in April.

In Asia, the Nikkei 225 surged 4.5% to its highest level in over three decades after the Bank of Japan chose to leave its ultra-loose monetary policy unchanged. The Shanghai Composite and the Hang Seng rallied 1.3% and 3.4%, respectively, after the People’s Bank of China cut a key policy rate for the first time in ten months.

UK house prices cool

Stock markets finished in the red on Monday (19 June) as investors took profits following last week’s rally. The FTSE 100 fell 0.7% and the Stoxx 600 lost 1.0% in a quiet day for trading. US indices were closed on Monday to mark the Juneteenth national holiday.

In economic news, Rightmove’s house price index showed average new seller asking prices slipped by £82 in June from the previous month. While this was a very small decrease (house prices were flat in percentage terms), it was notable in that it was the first monthly decline so far this year, and the first for this time of year since 2017. Rightmove said the recent significant increases in mortgage rates hadn’t affected buyer demand yet, but were creating “renewed disruption and uncertainty among movers trying to calculate how much they can afford to borrow and repay”. In the last four weeks, the average mortgage rate for a five-year fixed 85% loan-to-value mortgage has jumped from 4.56% to 5.20%.

Fed leaves interest rates unchanged

Last week saw the US Federal Reserve vote unanimously to skip an interest rate increase in June and instead hold the federal funds rate at the target range of between 5.00% and 5.25%. This was the first time the Fed had kept rates unchanged since March 2022. Fed chair Jerome Powell said it was a prudent move given “how far and how fast we’ve moved”.

However, Powell also signalled that further rate hikes are on the cards this year. He said the meeting next month would be a “live” one, which has been interpreted as meaning the Fed is likely to raise rates by 0.25 percentage points on 26 July.

The Fed’s decision came a day after the Labor Department issued its latest consumer price index (CPI) report. Headline inflation eased to 4.0% year-on-year in May, down from 4.9% in April and the slowest annual pace since March 2021.

On a monthly basis, prices rose by just 0.1% after increasing by 0.4% in April. However, core CPI – which excludes food and energy – rose by 0.4% for the third consecutive month.

ECB increases rates to highest level in 22 years

The European Central Bank (ECB) also met last week and decided to increase its key deposit rate by a quarter of a percentage point to 3.5%, the highest in 22 years. ECB president Christine Lagarde said another rate hike in July was “very likely” and that the ECB was “not thinking about pausing”. In a statement, the ECB said that while inflation was coming down, it is projected to remain “too high for too long”.

Despite seeing an easing in inflation, the ECB increased its forecast for core inflation for 2023 to 5.1%, up from 4.6% previously. This was mainly due to wage increases – average wages grew by 5.2% in the first quarter compared with a year ago. Meanwhile, the eurozone economy is expected to grow by 0.9% this year and 1.5% in 2024, down from the ECB’s previous estimates of 1.0% and 1.6%, respectively.

Bank of Japan sticks to ultra-low rates

The week ended with another major central bank meeting – this time at the Bank of Japan (BoJ). Although inflation in Japan has proved stronger than expected, the BoJ chose to maintain its -0.1% short-term interest rate target and a 0% cap on the ten-year bond yield set under its yield curve control policy. The bank reiterated its view that inflation will slow later this year.

“The bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions,” it said. “By doing so, it will aim to achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”

UK economy returns to growth in April

The UK economy returned to growth in April, with GDP expanding by 0.2% month-on-month after contracting by 0.3% in March, according to the Office for National Statistics. This was driven by an increase in car sales and customer spending in pubs and bars. The rise in activity was partly offset by junior doctors’ strikes, which held back health sector output.

The return to growth has added to expectations that the Bank of England will raise interest rates for the 13th time in a row when it meets on Thursday. It has also raised hopes that the UK will avoid a recession this year. Earlier this month, the OECD upgraded its economic growth forecasts for the UK. It expects GDP to grow by 0.3% this year and 1.0% in 2024, much better than its previous forecasts of a 0.2% decline in 2023 and a 0.9% rise in 2024. Nevertheless, all the other economies in the G7 apart from Germany are expected to grow at faster rates this year.

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

Chloe

21/06/2023

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

• China continues to be a global inflation outlier, with consumer price pressures absent, while producer prices fall further into outright deflation
• Central banks from US, Europe and Japan decide on interest rates this week, hot on the heels of surprise hikes from Australia and Canada last week
• US consumer price inflation in focus this week, and while inflation rates are expected to fall, core prices are still being judged as relatively stickier
• The flipside of sticky inflation, economic growth is proving more resilient, as UK Confederation of British Industry (CBI) last week upgrades its economic outlook for this year and next

What happened last week and what are the highlights ahead for markets this week

Global equities arguably had a better week last week than bonds, thanks to continued resilience of large cap US technology stocks in particular. For bond markets meanwhile, surprise hikes from central banks in Australia and Canada spooked bond investors, as they worried about the read-across for the US Federal Reserve (Fed) who meet later this week. Yields on US 10-year Treasuries were up +4.9 basis points (bps) on the week (including +2.1bps on Friday), finishing the week at 3.74%. Looking to the week ahead, we have central bank interest rate policy decisions, in calendar order from the Fed (Wednesday), the European Central bank (ECB, Thursday), and the Bank of Japan (BoJ, Friday). For the Fed, ahead of the meeting, we also get the latest May monthly reading of US CPI (Consumer Price Index) inflation on Tuesday. Rate hikes this week are thought to be most likely to come from the ECB, with the Fed expected to ‘skip’ a hike until July, while the BoJ is expected to continue to stay unchanged. In economic data due elsewhere, US Retail Sales are due Thursday and before that UK monthly GDP (Gross Domestic Product) for April is due Wednesday – expectations are for a month-on-month gain of 0.2%.

China continues to be a big global inflation outlier

Against the sticky and still-high inflation ‘run-of-play’ that we are seeing in most developed economies globally at the moment, economic data out from China on Friday gave markets an important reminder that the world’s second-biggest economy has a very different message: China continues to be a global inflation outlier. China’s latest CPI print for May edged up only slightly to 0.2% year-on-year (versus 0.1% year-on-year in April), while PPI (Producer Price Index) deflation looked entrenched, plunging -4.6% year-on-year. On PPI specifically, it was the eighth straight month of producer deflation and the steepest fall since February 2016. All in all, with inflation currently absent in China, that leaves its central bank with lots of room for manoeuvre to support its economy over the reminder of this year, should it be needed.

Central banks from US, Europe and Japan decide on interest rates this week, hot on the heels of surprise hikes from Australia and Canada

Last week’s central bank meetings from the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) are an important lead into this week in terms of how their actions has shaped expectations. Both the RBA and the BoC had been expected to leave their rates unchanged, but in the event, both hiked by 25bps. The BoC was particularly noteworthy – after its previous last hike in January, the Canadian central bank had signalled a pause, keeping rates on hold at their March and April meetings. That willingness to sit back however disappeared last week, and Canadian interest rates, at 4.75%, are now at 22-year highs. Driving the increased hawkishness has been inflation stickiness, a theme common to many central banks recently – in Canada’s case, annual CPI inflation rose to 4.4% in April, the first increase in 10 months.

The most important central bank of them all? US Federal Reserve meets

The focal point this week is the Fed rate announcement due Wednesday. For this week, Fed Funds futures are currently pricing in a circa 30% probability of a June hike of 25bps. By contrast, it seems the Fed might yet ‘skip’ a hike in June, only to post a rate-hike at their following meeting in late-July, where the probability of a hike rises to circa 55%. Also, important to look at this week with the Fed’s statement will be their latest Summary of Economic Projections, including their so-called ‘dot-plot’ of interest rate expectations. Feeding into the Fed’s rate decision will be the US CPI print due tomorrow. While the CPI ‘all-times’ annual rate is expected to drop to 4.1% in May (from 4.9% in April), much of that drop comes from the tougher comparative last year when energy and food prices were soaring. For the core CPI print (excluding energy and food prices), this is expected to be running higher at 5.3% but still down on April’s 5.5%.

The flipside of sticky inflation, economic growth is proving more resilient

For most western economies, inflation continues to be above target, especially in the case of core prices. Driving this inflation stickiness however, the flipside is that GDP data for some economies is proving to be somewhat more resilient than had been feared at the start of this year. Take the UK for example – estimates out last Friday from the UK CBI point to +0.4% GDP growth this year (up from a contraction of 0.4% previously), followed by +1.8% in 2024 (versus +1.6% previously). As the CBI noted in its press release “the [UK] economy looks to have fared better than expected in first half of 2023, and is set to steer clear of a recession … tailwinds to growth have strengthened since our previous forecast in December 2022: the global outlook has improved”.

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

Chloe

13/06/2023

Please see the below article from AJ Bell received this afternoon giving a market update for today (Friday 2^nd June 2023):

Market attention on Friday turned to the US employment report and, further out, the next interest rate decision by the Federal Reserve, after legislators passed a bill that will prevent the US government from defaulting on its debts.

Stocks were higher ahead of the May nonfarm payrolls report, due out at 13:30 BST.

The FTSE 100 index was up 74.26 points, 1.0%, at 7,564.53 at midday in London. The FTSE 250 was up 225.09 points, 1.2%, at 19,052.85, and the AIM All-Share was up 5.05 points, 0.6%, at 789.50.

The Cboe UK 100 was up 0.8% at 754.70, the Cboe UK 250 was up 1.3% at 16,610.82, and the Cboe Small Companies was up 0.4% at 13,632.09.

The US Senate voted to suspend the federal debt limit, capping weeks of fraught negotiations to eliminate the threat of a disastrous credit default just four days ahead of the deadline set by the Treasury.

Economists had warned the US government could run out of money to pay its bills by Monday. This left almost no room for delays in enacting the Fiscal Responsibility Act, which extends the government’s borrowing authority through 2024 while trimming federal spending.

Hammered out between Democratic President Joe Biden and the opposition Republicans, the measure passed the Senate with a comfortable majority of 63 votes to 36 a day after it had sailed through the House of Representatives.

‘Risk sentiment has improved markedly with the passage of the US debt ceiling deal through Congress,’ said Fawad Razaqzada, market analyst at City Index and Forex.com

As US President Joe Biden prepares to sign the legislation into law, attention now turns to the key US nonfarm payrolls report for May. It is expected to show an increase in jobs of 195,000, up from 253,000 in April.

‘US jobs numbers this afternoon may provide some pointers to the next move by the Federal Reserve, whose decision making no longer needs to consider the potential financial stability risks associated with default on US debt,’ said AJ Bell investment director Russ Mould.

‘If the non-farm payrolls data indicates continued tightness in the labour market, the Fed may feel it has to continue with rate rises when it meets on 14 June.’

Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker both made the case on Wednesday for a pause in interest rates hikes at the next meeting on June 13 and 14.

Stocks in New York look to continue their rally on Friday. The Dow Jones Industrial Average, the S&P 500 index, and the Nasdaq Composite all were called up 0.5%. On Thursday they ended up 0.5%, 1.0%, and 1.3%, respectively.

The dollar was mostly lower midday Friday in Europe.

The pound was quoted at $1.2530 at midday on Friday in London, up slightly compared to $1.2523 at the equities close on Thursday. The euro stood at $1.0770, higher against $1.0737. Against the yen, the dollar was trading at JP¥138.88, unchanged from Thursday.

Despite its softness ahead of the US jobs report, the dollar is set to rise further, Brown Brothers Harriman thinks.

‘Banking sector concerns and dovish market pricing for Fed policy had been major negative headwinds on the dollar in recent months, but those have finally begun to clear,’ BBH said. ‘Now, we believe passage of the debt ceiling deal removes the final headwind for the dollar, and so we see this recent rally continuing.’

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Andrew Lloyd DipPFS

02/06/2023

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday evening, which provides a global market and economic update.

Most major markets finished in the red in a week that saw worse-than-expected economic data from the UK and Germany.

In Europe, the FTSE 100 lost 1.9% as UK inflation rose by a higher-than-expected 8.7%. Pan-European Stoxx 600 lost 1.6% as the German economy contracted 0.3%, taking it into recession.

Over in the US, the S&P 500 rose 0.3% and the Nasdaq added 2.0% as hopes were raised of an agreement on the debt ceiling and optimism over artificial intelligence boosted chip stocks. Meanwhile, the Dow lost 0.6%.

Asia saw all markets decline due to concerns of the US debt ceiling despite a boost in tech stock.

Food inflation falls in May

The FTSE 100 dropped 1.38% on Tuesday (30 May), as UK shop price inflation rose to an annualised 9% in May, up from 8.8% in April, the highest rate in 18 years, according to the British Retail Consortium (BRC).

The BRC announced Tuesday that annualised food inflation fell to 15.4% in May, declining from 15.7% in March. The decline is driven primarily by a fall in energy and commodities costs.

UK inflation remains persistently high

Figures from the Office of National Statistics released last week showed that the UK Consumer Price Index (CPI) rose by an annualised 8.7% in April, down from 10.1% in March and higher than a predicted 8.4%. Falling energy and gas prices contributed to the decline but remain a main driver of inflation alongside food and non-alcoholic beverages. On a monthly basis, CPI rose by 1.2% in April compared to 2.5% in April 2022.

Core CPI (excluding energy, food, alcohol and tobacco) rose by 6.8% in the year to April, up from 6.2% in March, the highest level in over 30 years.

The higher-than-expected inflation figures have led to a sharp decline in bonds, as investors expect the Bank of England (BoE) to raise interest rates further this year. The yield on two-year gilts rose to 4.4% on Wednesday last week, up from 3.7% earlier in the month. Yields rise when bond prices fall.

UK mortgage costs rose by up to 0.45 percentage points at the end of last week, with rates on fixed-rate deals now reaching 5.0% and over. The average two-year and five-year fixed-rate deals are now 5.63% and 4.80% respectively, according to USwitch.

Mortgage lenders have pulled nearly 800 residential and buy-to-let mortgage products from the UK markets in the anticipation of further interest rate hikes, figures from Moneyfacts show. Residential mortgages have fallen by almost 7% in a week, while buy-to-let products have dropped by more than 14%.

Chancellor Jeremy Hunt said on Friday that he was comfortable with the UK entering a recession if this would help bring down inflation, and that he would support the BoE raising interest rates, even as high as 5.5%, to stifle price growth.

UK retail sales volumes rise

British shoppers increased their spending last month as UK retail sales volumes grew by 0.5% in April, rebounding from a fall of 1.2% in March.

The non-food stores sector was boosted by strong performance in the other non-food stores sector, which saw 2.1% monthly growth thanks to strong sales of watches and jewellery and sports equipment. Clothing store sales volumes grew by 0.2%, while household goods fell by 0.2%.

Food store sales rose by 0.7% following a fall of 0.8% in March. Automotive fuel sales volumes fell by 2.2% in April following a 0.1% rise in March.

On a quarterly basis, sales volumes rose 0.8% in the three months to April compared to the previous three months, the highest rate since August 2021.

US debt ceiling agreement reached

US president Joe Biden and House of Representatives speaker Kevin McCarthy have agreed to suspend the US debt ceiling into 2025. The deal would see non-defence spending remaining roughly flat in 2024 before increasing by 1.0% in 2025. Defence spending would increase to $886bn, in line with president Biden’s previously proposed defence budget. The White House estimates that government spending would be reduced by at least $1tn, but no official calculations have been released yet. Most of these savings would come from capping spending on domestic programmes for housing, border control, scientific research and other discretionary spending.

The deal will need to be approved in the House of Representatives and the Senate before 5 June, when the US could default. While some lawmakers are expecting the deal to go through, several Republicans have publicly stated they will vote against it.

The deal has faced bi-partisan criticism; Republicans have argued it does not go far enough to reduce spending or target Biden’s student loan forgiveness plan, while Democrats have targeted the inclusion of work requirements for federal assistance.

Germany enters recession

Germany has entered a recession as the economy contracted 0.3% between January and March, according to government figures. The figures follow a 0.5% contraction in the final quarter of last year. A recession occurs when a country’s economy shrinks for two consecutive quarters.

Germany’s annualised inflation rate hit 7.2% in April, exceeding the eurozone average rate of 7.0%.

An increase in private sector investment and construction at the start of the year was offset by a decline in consumer spending. Household spending fell by 1.2% in the first quarter, as consumers reduced spending on food and beverages, clothing and footwear, and furnishings. Government spending also decreased by 4.9% compared to the previous quarter.

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

Chloe

01/06/2023

Please see below article received from Brooks Macdonald yesterday afternoon, which provides a succinct but detailed global market update.

• Equities rose last week despite the risks of the US defaulting on its debt obligations
• President Biden and Republican Speaker McCarthy are set to meet at the White House to continue negotiations
• This week sees the release of the US Federal Reserve’s (Fed) preferred inflation measure as well as the UK’s inflation numbers

Equities rose last week despite the risks of the US defaulting on its debt obligations

Equity markets rose last week as investors shrugged off the impending US debt ceiling deadline, focusing on a constructive earnings season and the likelihood that the US has already reached its peak interest rate for this economic cycle.

President Biden and Republican Speaker McCarthy are set to meet at the White House to continue negotiations

Despite the fact there is still no final deal, and Republican negotiators walked out of talks on Friday, last week saw growing optimism that the US political leadership would find a compromise arrangement to avoid defaulting on US obligations. This helped equity markets to rise after trading in a tight range over the last month given concerns around the US debt ceiling and US regional banks. President Biden and House Speaker McCarthy are set to continue debt ceiling talks at the White House later today. Over the weekend there was a phone call which pointed to a more constructive tone than one would have imagined from the walkout on Friday. With Treasury Secretary Yellen warning that the chances were ‘quite low’ that the US could meet its obligations from mid-June, the stakes are high even if the mood music appears more favourable.

This week sees the release of the Federal Reserve’s preferred inflation measure as well as the UK’s inflation numbers

This week will see the release of the Personal Consumption Expenditure (PCE) inflation data series in the United States. This is the Fed’s preferred inflation measure and will be a major consideration when the Fed meets to determine the US interest rate in June. The University of Michigan will also release its final survey readings on Friday which include the medium-term consumer inflation expectations. The preliminary readings showed that consumer expectations for 5-10 year inflation had risen significantly (2.9% to 3.2%) which if confirmed in the final reading would be a concern to the Fed that is trying to keep expectations closely anchored to its 2% target. The latest UK inflation numbers will come on Wednesday with the market expecting a sharp fall from last month’s 10.1% year-on-year rise to 8.2%. Core inflation is expected to remain quite sticky however, falling from 6.2% to 6% year-on-year.

Despite US, and global, inflation remaining higher than policy makers would have hoped, the market still considers a pause in US interest rates as the most likely outcome. On Friday Fed Chair Powell said that ‘we can afford to look at the data and the evolving outlook to make careful assessments’, indicating that the Fed is in no rush to raise rates given that there is a lag between their previous hikes and the impact on the economy.

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

Chloe

23/05/2023

Please see below article received from Brewin Dolphin yesterday evening, which discusses why inflation remains high, whether a US recession is imminent, and the longer-term outlook.

Why is inflation still high after multiple rate hikes?

Interest rate changes can take a long time to materially affect inflation. Part of the reason is that many loans have fixed terms, where the interest payment does not immediately reflect changes in the central bank policy rate. Rate hikes have started to make an impact, but it will take time for the full effect to be felt.

The extent to which rate hikes influence different inflation categories varies. Central banks exercise a lot of control over house price and rental inflation, as this is a very interest rate-sensitive sector. Rate hikes have already depressed real-world rental inflation, but this takes time to impact consumers as it depends upon when rental agreements are renewed.

Wage inflation tends to be the most important determinant of services inflation excluding housing. The eventual drop in consumer and business spending from rate hikes leads to weaker demand for workers, which then depresses wages. In this sense, rate hikes have a big impact on services ex-housing inflation, but there can be long lags. At present, labour markets in many countries are very tight. For example, in the US there are currently 1.6 job openings for every unemployed worker. This tightness is keeping services ex-housing inflation running strong, notwithstanding the building headwind from higher rates.

Rate rises tend to have a weaker impact on tradeable goods inflation. Food inflation has dropped sharply in recent months in the US, but it remains strong in the UK and other European countries. The Russian invasion of Ukraine, regional weather and its impact on harvests, and foreign exchange movements explain much of the relative divergence in food price inflation in the US and Europe.

When will mortgage holders feel the impact?

It goes without saying that those who are on variable[1]rate mortgages are already feeling the impact of higher mortgage rates. But most households in the US and UK are on fixed-rate deals. Some households on fixed-rate mortgages have already begun to marginally reduce their spending in anticipation of their deals coming up for renewal at higher rates. In its May monetary policy report, the Bank of England (BoE) estimated that higher mortgage rates reduced UK aggregate household consumption by 0.3% in the first quarter of the year. This reduction in spending is being driven by mortgage holders on variable rates as well as those on fixed rates that have already reset.

We would expect that the majority of the reduction in spending will occur when fixed-rate deals actually renew. Roughly 85% of residential mortgages in the UK are fixed, but with terms for the most part at five years or less. The BoE estimates that higher mortgage rates will reduce aggregate household consumption by almost 0.5% by the fourth quarter of 2024. Notably, mortgage terms in the US are generally fixed for a much longer period, often to 30 years.

Another potential impact of higher mortgage rates is an increase in homeowners defaulting on their loans. The extent to which defaults occur will be linked not just to how high mortgage rates go (and for how long they stay there), but also by how the economy evolves. It is safe to say that if unemployment rises substantially, mortgage defaults will increase.

Have rate hikes been more effective in the US?

Several forces have brought inflation down faster in the US than in other regions. For one, the Federal Reserve (Fed) has been more aggressive in its monetary tightening efforts compared to most other central banks. The Fed has so far raised rates by five percentage points. This is above the 4.4 percentage points of hikes implemented by the BoE and 3.75 percentage points of hikes by the European Central Bank.

Meanwhile, until last autumn, the US dollar was strong, which depressed traded goods inflation. Weak European currencies relative to the dollar had the opposite effect. In addition, the inflation stemming from Russia’s war in Ukraine has had more of an impact on Europe. Wage-driven inflation has been a factor on both sides of the Atlantic, as demand for workers has been strong. But the UK has struggled more than most countries with labour supply, with Brexit likely a contributing factor.

What is the relationship between rate hikes and recessions?

Of the 13 Federal Reserve rate hike cycles since the mid-1950s, ten have been followed by a recession that began within a year-and-a-half of the last rate hike of the cycle. While this is clearly a high hit rate, it’s important to note that tightening cycles don’t happen in isolation and are not always the main driver of a recession.

Of the four US recessions that have occurred since 1990, the Fed certainly played a role, but the rate hikes were arguably not the primary cause of any of them. In two of these cycles, a shock rather than rate hikes was the primary cause of the recession. This was the case in 1990, when the economy only went into recession after the oil price spike due to the Gulf War. It was also the case in early 2020, when the recession was all about the Covid shock and had little to do with the Fed’s rate hikes of 2018.

In the other two cycles, the recessions were driven more by the unwinding of large excesses. In 2001, the recession was much more about the contraction in technology-related investment spending than it was about Fed rate hikes. Consumer spending (which represents about 70% of the economy) didn’t decline at all in that recession. In 2008/09, Fed rate hikes certainly acted as a catalyst (as was the case in 2001), but the recession was more about the unwinding of the excesses in banking and housing following a period of very lax lending standards. The main point is that the relationship between rate rises and recessions is not straightforward.

We believe it is more likely than not that the US suffers a recession, with a start date at the end of this year or perhaps in early 2024. But our conviction in this forecast is not high as there are pathways to a ‘soft landing’ (a slowdown in economic growth that avoids a recession). Europe and the UK may avoid an outright recession, but we expect growth to be sluggish. If a US recession does occur, it will likely be mild. A mild recession would limit increases in both the unemployment rate and mortgage defaults. It is also worth highlighting the supply/demand backdrop for housing, which is tight. House prices will suffer as this BoE rate cycle goes on, and to the extent that unemployment rises. But because there is so little supply, that should help to limit the declines. Similar supply and demand dynamics exist to support UK house prices in the face of higher mortgages rates.

What has happened historically after periods of low interest rates?

Central banks hiked rates rapidly in several periods during the 1970s and 1980s, but rates were not low heading into these cycles. Rates were low for a long time following the global financial crisis of 2008, but the subsequent rate hike cycles (2015-18 for the Fed and 2017-18 for the BoE) were very modest. There’s no good historical precedent for the current environment.

Mark Twain’s quote, “History does not repeat itself, but it often rhymes”, is often used to compare economic cycles. As highlighted above, some cycles involve shocks. Other cycles involve the build-up and subsequent unwind of excesses and imbalances. Some cycles see both occur. This cycle has its own similarities and differences with those of the past.

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

Chloe

19/05/2023

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday evening, which provides an update on global markets.

Stock markets were mixed last week as the US Federal Reserve and European Central Bank (ECB) hiked interest rates.

The S&P 500 rallied on Friday after the US nonfarm payrolls report beat forecasts. Despite this, the index ended the week down 0.8%, following comments from Fed chair Jerome Powell that interest rate cuts might not happen as soon as investors had hoped.

The pan-European Stoxx 600 declined 0.3% after ECB president Christine Lagarde said interest rates would rise to “sufficiently restrictive levels” until inflation eased to the bank’s 2% target. The UK’s FTSE 100 fell 1.2% ahead of the Bank of England’s (BoE) interest rate decision on 11 May.

Japan’s Nikkei 225 added 1.0% during the first two days of the week following a sell-off in the yen. The index was closed for the remainder of the week for national holidays. China’s Shanghai Composite ended its holidayshortened trading week up 0.3%, despite the official manufacturing purchasing managers’ index falling into contraction territory for the first time since December.

Stocks slip ahead of US inflation data

Stock markets fell on Tuesday (9 May) as investors looked ahead to the release of US inflation numbers on Wednesday. The consumer price index will be closely monitored for any insights into the Federal Reserve’s next monetary policy decision.

The BoE is expected to hike interest rates for the 12th time in a row on Thursday, with economists and markets anticipating a quarter of a percentage point increase to 4.5%. It comes after official data showed the rate of inflation stood at 10.1% in March, far higher than expected.

US nonfarm payrolls beat forecasts

Last Friday saw the release of the closely watched US nonfarm payrolls report, which showed surprisingly strong jobs growth in April. Some 253,000 new jobs were added during the month, higher than the 180,000 forecast by economists and the 165,000 job gains recorded in March.

The report from the Department of Labor also showed average hourly earnings increased by 0.5% month-onmonth, the highest rate since the middle of last year. Meanwhile, the unemployment rate fell back to a 53-year low of 3.4% from 3.5% the previous month.

Separate data showed the number of job openings shrank for a third consecutive month in March. However, there are still 1.6 job openings for every unemployed person, which suggests the labour market remains tight.

Fed hikes rates as expected

Earlier in the week, the Federal Reserve hiked interest rates by a quarter of a percentage point, taking the benchmark fed funds rate to between 5.0% and 5.25%. The statement from the Federal Open Market Committee omitted language saying that further policy firming may be appropriate. Instead, it said officials would take into account how the impact of monetary policy was accumulating in the economy.

At a press conference later in the day, however, Powell indicated that it was too soon to say with certainty that the rate-hiking cycle is over. Powell said the Fed was “closer, or maybe even there”, but that it was “prepared to do more” and future policy decisions would be made on a meeting-by-meeting basis. Powell also indicated that a pivot to cutting rates would not occur this year.

ECB scales back rate increases

The ECB also increased interest rates by a quarter of a percentage point last week, scaling back from its three previous half-percentage point increases. The move takes the main policy rate to 3.25%.

However, Lagarde indicated that the fight against inflation is far from over. “We have more ground to cover and we are not pausing, that is extremely clear,” she said. Lagarde added that some of the ECB’s rate-setters had called for a bigger increase and that the “inflation outlook continues to be too high for too long”. Headline inflation in the eurozone rose for the first time in six months in April to 7.0% year-on-year, up from 6.9% in March.

Housing market shows signs of stabilising

Here in the UK, data from the Bank of England suggested the housing market could finally be stabilising after the turmoil caused by last autumn’s mini-budget. Net mortgage approvals rose for a second consecutive month to 52,000 in March, up from 44,100 in February and much higher than expected. This came after data from Nationwide showed UK house prices unexpectedly rose by 0.5% in April, following seven consecutive months of declines. The cost of an average home increased to £260,441, which was still 2.7% lower than a year ago.

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

Chloe

11/05/2023