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Please see the below article from EPIC Investment Partners detailing important information on what we can expect in the upcoming week. Received this morning 16/09/2024.

The main event this week is expected to be the FOMC meeting (Tue-Wed), where the start of the easing cycle is forecast to begin. Other central bank meetings include the BoE (Thu) and BoJ (Fri). Later today we have UK house prices and US empire manufacturing data prints later today. Tuesday’s main event will be the US retail sales figures, earlier we have Germany ZEW expectations. Eurozone and UK CPI, and US housing starts feature on Wednesday. The BoE meets on Thursday, markets will look for any indications on the QT strategy. Japan CPI and the BoJ’s rate decision and future rhetoric will keep markets busy on Friday morning. 

Central bank chatter includes the ECB’s Panetta and Nahel on Monday. Vujcic and Holzmann speak at a conference on Wednesday. Knot and Schnabel follow on Wednesday at separate events. On Friday we will hear from Lagarde as she delivers the IMF’s Michel Camdessus Central Bank Lecture. 

Markets witnessed mixed sentiment last week, as they digested US CPI and PPI data, and jobs reports. The yield on the US 10-year rallied 6bps to a new year-low of 3.65%, and the S&P Index rebounded +4.02%. Meanwhile, the dollar closed marginally lower, and oil rose 0.77%, to $71.61pb.

The US CPI report, the final one before next week’s FOMC meeting, gave markets plenty to consider. Both headline and core CPI matched expectations year-over-year at 2.5% and 3.2%, respectively. However, the slight uptick in August’s core CPI, combined with stronger real average earnings—hourly earnings up 1.3% YoY (previously 0.7%) and weekly earnings up 0.9% YoY (from 0.4%)— tempered market expectations for a rate cut this week. Next, August’s PPI data revealed a slower-than-anticipated annual growth in producer inflation, the headline print rose 1.7% YoY (est. 1.8%, prev. 2.1%). Core producer inflation, excluding volatile food and energy prices, also increased at a steady but slower rate of 2.4%, falling short of the 2.5% forecast. This deceleration in factory gate prices typically indicates weakening consumer spending, which has historically led to speculation about potential interest rate cuts by the Fed. Markets closed the week pricing in a 25bps cut this week and anticipate at least four rate cuts this year.

The ECB reduced interest rates for the second time this year, lowering the key deposit rate by 25bps to 3.5%, in line with expectations. President Lagarde emphasised a data-dependent approach, stating that future rate decisions are not predetermined. The ECB maintained its inflation projections for 2024-2026, expecting a decline towards the 2% target by 2025, despite anticipating a temporary rise in inflation later this year. Growth forecasts for 2024 were revised downward to 0.8%, reflecting weaker domestic demand. The ECB also decreased rates on main refinancing operations and marginal lending facilities to 3.65% and 3.90%, respectively. The broader message was that whilst acknowledging downside risks to economic growth, the ECB aims to moderate monetary policy restrictions whilst remaining vigilant about inflation trends. On Friday, the central bank’s President Lagarde said the ECB could cut again in October if the economy suffers a major setback.  

Elsewhere, China’s economy is currently grappling with a complex set of challenges and opportunities. Recent data highlights a persistent imbalance between robust external demand and lacklustre domestic consumption. This disparity has begun to affect both households and businesses, casting doubt on the nation’s ability to achieve its ambitious 5% annual growth target. While exports, particularly to the EU, have shown encouraging growth, internal economic indicators paint a more sobering picture. Credit expansion has slowed markedly, as evidenced by the widening gap between M2 and M1 money supply growth. Retail sales, released over the weekend, have decelerated amidst rising unemployment, and fixed asset investment has waned, primarily due to a downturn in infrastructure spending. Nevertheless, there are glimmers of hope. The equipment manufacturing sector has emerged as a stabilising force, and government initiatives such as the ‘trade-in’ policy are yielding positive results. Moreover, accelerated government bond issuance is expected to bolster infrastructure projects in the coming months. Intriguingly, despite increased bond supply, yields on Chinese government bonds have continued to decline, with long-term rates reaching new lows for the year. This complex economic landscape underscores the delicate balancing act facing Chinese policymakers as they navigate the path to sustainable growth.

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

Alex Clare

16/09/2024

Please see the below article from Tatton Investment Management detailing their thoughts on markets over the past week, received this morning:

Market fears fading

Global stocks recovered well last week, in a sign that the early September jitters are fading. The European Central Bank (ECB) cut interest rates again – though president Lagarde warned that the path down isn’t guaranteed. This was interpreted as a hawkish signal, and markets’ implied European rate expectations flattened somewhat. The decision came just after a former advisory board member argued in the FT that the “ECB has no room to cut rates”. They pointed to sticky services inflation, and Eurozone rates being two percentage points below the US. But Europe’s economy clearly needs support, as highlighted by former ECB president Mario Draghi’s call for a “new industrial strategy”. 

By contrast, the US Federal Reserve’s clear dovishness is supporting US markets. Stocks were boosted by inflation data, which showed domestic demand staying strong. This probably would have unnerved markets a few months ago – suggesting persistent inflation and possibly delayed rate cuts – but investors are now happy about US resilience. This was matched by a general sense of fears dissipating, including a rebound for Nvidia. The US presidential debate didn’t move markets in either direction, but that too is a sign that investors are confident enough about the economy.

So, attention turns to the Fed’s meeting this week, with the bank expected to deliver a 25 basis point cut. A bigger cut would probably be interpreted negatively, as the Fed lacking confidence in the US economy. Ultimately, the trajectory and pace of rate changes matter more than the magnitude of individual cuts – and the Fed has been clear it wants to be supportive. This stance perplexes some, considering US economic strength and, hence, relatively smaller need for policy support. But, inflation and employment are more delicate than they seem, and there are pockets of the economy which are struggling from high rates (as shown in problems at Ally Financial). 

We therefore expect the Fed to cut. There could be volatility if officials deviate from these expectations.

Budget and growth gloom make UK rate cut certain

Chancellor Rachel Reeves has warned of “difficult decisions on tax, on spending, and on welfare,” at the 30 October budget. Investors are worried this might mean changes to capital gains tax (CGT) or pension relief. We have said for months that CGT will probably rise, but shouldn’t affect the value of UK investments too much. Pension changes could be more significant, as these have more direct economic impacts.

Unfortunately, recent UK data matches the government’s gloom. Growth was flat in July and manufacturers are struggling – despite apparently positive sentiment surveys over the summer. Annual inflation was below expectations, and prices fell month-on-month. Unemployment fell, but youth unemployment rose to its highest since the pandemic. Britain seems to be in a similar phase to the decade after the global financial crisis: low unemployment and low inflation – but sluggish growth.

Markets therefore expect the Bank of England to cut rates by 25 basis points in November. BoE hawks warned about a ‘wage-price spiral’ as recently as August, but payroll data is weaker than in the US – where the central bank is now worried about a deteriorating labour market. The hawks will likely back down, and the BoE could cut rates by more if the Labour government enacts the austerity it alludes to.

Previously strong business sentiment – particularly among housebuilders – might have been pumped up by the new government’s honeymoon period. Now that it’s over, we’re seeing weaker data, but much of it is backwards looking. The steeper path for rate cuts into 2025 should help, supporting mortgage owners. It is too early to tell whether the green shoots of a few months ago will bear fruit, but recent signs are less than ideal. The outlook is not all dreary, but summer chirping is certainly over.

How China trades

Chinese exports were surprisingly strong in August. This suggests Chinese producers are rushing out inventory, ahead of a potential second term for Donald Trump, and the increased tariffs that would bring. US-China trade has been hampered since Trump first came in, and last year Mexico officially replaced China as the US’ largest trading partner. 

Often underappreciated is the fact that the US is not China’s biggest trading bloc either, though. EU-China trade was worth more in 2023, and ASEAN (comprised of 10 southeast Asian nations) is China’s largest trading partner by far. This is in part fallout from the US trade wars, but it could dampen the impact of any new tariffs. If so, Beijing has to think about its trade policies differently. It kept its currency stable against the dollar for most of 2024, for example, despite domestic weakness. That effectively meant tighter Chinese financial conditions and less competitive exports. 

Total trade isn’t the whole story, though. The US accounts for China’s largest trade surplus (meaning capital flows from the US to China) and Washington’s tariffs tend to influence other tariff regimes around the world (the EU has since introduced a levy on Chinese electric cars, for example). If Trump entered the White House again, he could also do indirect damage to China by putting tariffs on other countries. Much of China’s exports to ASEAN, India and Mexico are intermediate goods which are re-exported to the US, for example.

China wants to shift its economy to become domestic demand led, but this process has stalled in the last few years and consumption is weak. A weak export outlook is another hurdle, and Chinese exporters seem resigned to a gradually worsening tariff environment. We expect Beijing to maintain a diplomatic dialogue, but impose occasional countermeasures as they pursue a long-term trade realignment.

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

Andrew Lloyd

16/09/2024

Please see below, Brooks Macdonald’s Daily Investment Bulletin which provides a brief analysis of the latest news from global investment markets. Received today – 12/09/2024

What has happened?

The focus for investors yesterday was the latest US consumer inflation figures. Aside a still-stubborn and widely perceived lag in US shelter rental inflation, the data was otherwise broadly consistent with a narrative of inflation continuing to fall, albeit gradually, towards the US Federal Reserve’s 2% inflation target, but equally not signalling recession worries either. While markets appeared initially downbeat on the data, equity indices were later moved up by a rally in US mega cap US technology shares which drove the overall market higher. Those tech moves were led by generative Artificial Intelligence chip play Nvidia, which finished the day up +8.15% in US dollar terms, its strongest day’s performance since July.

About that US CPI data

The latest US Consumer Price Index (CPI) data landed yesterday. A glance at the year-on-year numbers suggested a good set of data, with headline all-items CPI falling to +2.5% in August, a touch better than the +2.6% expected, down from July’s +2.9% and the lowest print since February 2021. That headline fall was boosted by the ongoing weakness in the oil price which as a reminder got to under US$70 per Brent barrel earlier this week, its lowest levels since last December, though it saw a bounce yesterday. As for the core (excluding energy and food) CPI, that was inline at +3.2% year on year. However, the shorter-term trend shows the stubbornness of shelter rent inflation, which contributed to leave core CPI up by +0.28% month-on-month between July and August, the most in four months, and running at a one-month annualised rate of +3.4%.

European Central bank cut expected

Later today, at 1.15pm UK time, we get the outcome from the European Central Bank (ECB)’s latest monetary policy meeting. According to a Bloomberg survey, all 68 economists surveyed have nailed on a 0.25% cut later today, which if that is the outcome, would take the ECB deposit interest rate down to 3.5%, from 3.75% currently. For context, the ECB first cut rates back in June, but then paused in July. After today, the debate appears to be around the path ahead, and will-they-won’t-they cut again in the next couple of meetings later this year (in October and December). By way of reference, the latest (flash) Euro Area annual core CPI inflation rate in August was running at 2.8%, the lowest in four months.

What does Brooks Macdonald think?

We can most likely ignore the shelter rent-driven impact in yesterday’s US core CPI inflation data. Given the way that rent inflation is calculated (looking at all leases rather than just new leases), it is a lagging indicator. Instead, looking at more current measures of rental inflation such as US real-estate sites Apartment List and Zillow show a different story. In their national rent indices, these private measures of annual rent inflation are lower than they were immediately prior to the pandemic in 2020, and in the case of Apartment List, annual rent inflation is actually running negative. All in all, yesterday’s US inflation data looks benign-enough for the Fed to probably ignore it and continue to focus on the jobs side of its dual mandate. As for the markets, with the inflation data there or thereabouts versus expectations and not worryingly weaker, the flipside is that the data has reduced the chances for an outsized 0.50% cut from the Fed next week, with expectations now coalescing around a smaller 0.25% cut instead.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

12^th September 2024

Please see this week’s Markets in a Minute update below from Brewin Dolphin, received yesterday afternoon – 10/09/2024.

Guy Foster, Chief Strategist, discusses the two points of pressure for investors: the strength of the U.S. economy and uncertainty over the outlook for semiconductor sales. Plus, Janet Mui, Head of Market Analysis, analyses fresh U.S. jobs data.

Last week was a back-to-school week for markets, and generally, risk assets slipped slightly. There was a little panic over the summer as consumer activity weakened. Some even speculated that the Federal Reserve (the “Fed”) would impose an emergency interest rate cut ahead of its next scheduled meeting.

Did a break on the beach settle the nerves or incubate the anxiety of your average investor? Last week provided some answers.

Nvidia under the spotlight

A couple of weeks ago, we discussed how investors were underwhelmed by Nvidia’s extraordinarily strong earnings. Last week, they had to contend with the U.S. Department of Justice (DOJ) sending subpoenas to Nvidia and other companies, as it seeks evidence the chipmaker violated antitrust laws.

It was known that the DOJ had been investigating the dominant provider of artificial intelligence (AI) processors, but this was an unexpected escalation, which caused volatility globally across several stocks operating within the chip-making ecosystem.

While the outcome of the investigation is obviously a concern for investors, the volatility likely reflects their anxiety about the broader issues surrounding the AI processor boom. Although these companies are making enormous sales at the moment, it’s uncertain how long the current surge in sales will last, and to what level they’ll revert when the cycle slows.

U.S. consumer woes

The second major anxiety for investors relates to the strength of the U.S. economy. We’ve talked in recent weeks about how the consumer sector has been holding up, with retailers in particular citing a change in behaviour, whereby consumers buy less or trade down to cheaper brands.

Last week, Goldman Sachs held its Global Retailing Conference, and the message remained broadly the same. The discount store chain Dollar Tree painted a peculiarly graphic picture of its average customer – a low-income family also holding a second job, where those additional hours seem to have gone away or be on the wane.

So, consumer-facing companies have reported some weakness, which seemed at odds with some of the economic data.

Last week, we saw a bit more evidence these companies’ experience is broadly shared. The Fed produces a report called the Beige Book. It’s similar to the Bank of England’s Agents’ report – a summary of anecdotal interviews with key business contacts, which contrasts with the statistical data investors spend time trying to interpret. This showed economic activity growing slightly in just three (out of eight) districts. It told of employers generally maintaining employment but cutting labour costs by reducing extra hours or not replacing job leavers. The tone was downbeat but not alarming, and there was a large regional variation.

We also learnt the number of job openings declined (again). It remains high, but less abnormally so. Last week’s purchasing managers indices showed the U.S. manufacturing sector was contracting.

Friday saw the final and most anticipated piece of the puzzle, the U.S. employment (nonfarm payroll) report. Like much other data last week, headline jobs growth was weak. It also included negative revisions to previously reported data, which perhaps helps explain why companies seemed to report weakening activity levels before they were evident in the economic statistics.

Putting these data together, the case seems compelling for a double (half percentage point) interest rate cut when the Fed meets in a week’s time. As it stands, the market’s only expecting a single cut because Fed speakers have not yet prepared investors for anything more drastic. Some fear a more drastic cut could unsettle the markets, but the Fed has asserted for months that policy is very restrictive.

As such we’ve discussed how the Fed needed inflation data to turn before it could justify a cut. Now the data finally supports its assertion, it seems entirely plausible it should want to reduce that degree of restrictiveness significantly.

Not all bad news

The data doesn’t mean there’s reason to panic. This perhaps explains the market’s initial response to these figures, which was an increase in futures, suggesting investors think this bad news could be treated as good news.

Sadly, the positive sentiment didn’t last, and the U.S. equity market ended the week well down. This decline was led by economically sensitive consumer stocks, but technology also underperformed as the market digested Broadcom’s results, which didn’t see revenue guidance upgraded.

Soft-landing hopes remain intact because although jobs growth was weaker than expected, when coupled with decent earnings growth, it underpins that growth still looks good for the current quarter. And even though the manufacturing sector purchasing managers index (PMI) may be experiencing a recession of sorts, the much more significant services sector PMI was pretty strong.

That wasn’t just a U.S. phenomenon. In Europe, the Eurozone and UK both saw robust expansion in services sector activity. There were weaknesses though, with Germany remaining a weak spot within Europe.

The European Central Bank may cut rates again this week, particularly as it had some good news on the inflation front; the measure of compensation per employee, which it uses as a gold standard measure of wage inflation, slowed further in the second quarter.

In the UK, the economic news continued to be strong as the economy rides on the waves of tax cuts and wage increases. Therefore, the Bank of England can probably afford to leave rates unchanged when it meets next week.

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

Charlotte Clarke

11/09/2024

Please see below yesterday’s daily update article from EPIC Investment Partners:

The US presidential debate (Tue), US CPI (Wed), US PPI (Thu), and potential ECB cut (Thu) will garner market interest this week. Later today Apple launches its iPhone 16 along with other tech. China trade data kick starts Tuesday, and later we have Germany CPI and UK unemployment prints. US CPI takes centre stage on Wednesday given it is the last inflation figure before the Fed’s next meeting. Currently, markets expect headline CPI to have eased to 2.6% yoy, with the core reading stagnant at 3.2% yoy. US PPI follows on Thursday. Markets will monitor PPI components such as airfares and financial services components which feed into the Fed’s preferred inflation gauge, the PCE deflator. The week ends with the preliminary Uni. of Michigan consumer sentiment prints for September. 

Last week’s broader risk-off sentiment supported bonds amid generally softer data from the US. The yield on the 10-year UST rallied 19bps to 3.71% by Friday’s close. The S&P Index suffered a 4.25% loss driven by slowdown fears. The DXY Index fell 0.51%. Meanwhile, Brent slipped 9.82% to $71.02pb amid demand concerns. 

The US ISM manufacturing reading remained in contraction, and fell below expectations in August. However, this was stronger than the July print. Next JOLTS job openings and the ADP employment change both disappointed. Then Friday’s non farm payrolls indicated a more pronounced slowdown in the labour market than expected. Job gains reached only +142K, considerably lower than the market forecast of +165. Additionally, previous reports were revised downwards, with last month’s already weak figure of +114k adjusted even further to a mere +89k. On the other hand, the unemployment rate fell to 4.2%, in line with market expectations, and average hourly earnings ticked up to 3.8% yoy. While the disappointing job growth in isolation might suggest a 50bp cut, the steady unemployment rate coupled with still strong wage growth could prompt the Fed to opt for a more modest 25bp reduction. It presents a challenging balancing act for the central bank, weighing the recent weakening jobs data against the upside inflation pressures. 

A downbeat August Fed Beige Book noted that while “employment levels were generally flat to up slightly in recent weeks,” it also stated that “employers were more selective with their hires and less likely to expand their workforces” due to heightened concerns over demand and the economic outlook. The report also noted that “manufacturing activity declined in most districts”. We also heard from several Fed members including Goolsbee who stated: “it is pretty clear that the path is not just rate cuts soon” but multiple cuts over the next 12 months. On Friday, Williams stated that “it is now appropriate to dial down the degree of restrictiveness” amid a more evenly balanced economy. Over the weekend, US Treasury Secretary Yellen maintained that while there are risks, recent cooling in the labour market is a signal of a soft landing, not a recession. 

Elsewhere, China’s PPI and CPI disappointed this morning, reading -1.8% yoy, and +0.6% yoy in August, respectively. The marginal tick-up in CPI was due to higher food costs resulting from weather disruptions, rather than a pick-up in domestic demand. Over the weekend, the nation’s FX reserves topped USD 3.28tn. Meanwhile, the domestic real estate market faces uncertainty as current easing measures are deemed inadequate, with speculation about potential government intervention or local inaction. Financial markets reflect this uncertainty, with government bond yields dropping and discussions about monetary policy adjustments evident. The People’s Bank of China (PBoC) has indicated room for reserve requirement ratio (RRR) cuts and emphasised data-dependent interest rate decisions. Markets will look for any stimulus indications from policy makers at China’s People’s Congress committee meetings. The One Belt and Road initiative summit will also be of interest this week.  

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

Andrew Lloyd DipPFS

10/09/2024