Please see below, EPIC Investment Partners’ Daily Update detailing the latest figures on the strength of the US economy. Received this morning – 31/05/2024
The Fed’s Beige Book lived up to its name, revealing little in the way of new colour on the US economy, which it noted had maintained modest growth from early April to mid-May, though conditions varied across industries and regions.
Most districts reported slight economic expansion, though consumer spending remained subdued due to high inflation and uncertainties. Some sectors like travel/tourism and housing showed resilience. Employment rose slightly overall with modest job gains, but labour shortages persisted. Wage growth was moderate. Inflation continued rising modestly, with businesses facing consumer pushback on price hikes and smaller profit margins. Input costs were mixed, with some declines in material prices. Modest price growth was expected near-term.
Despite pockets of resilience, overall economic outlooks grew more pessimistic due to rising uncertainties and downside risks stemming from inflation, tighter financial conditions, and economic headwinds.
Furthermore, data released yesterday showed the US experienced a slower growth rate in the first quarter of the year than initially estimated, primarily due to weaker consumer spending on goods. GDP rose 1.3%yoy, lower than the previous estimate of 1.6%. Personal spending, which is the main driver of economic growth, advanced by 2.0%, a downward revision from the earlier estimate of 2.5%.
We also had an insight into corporate profits and inflation figures. Adjusted pre-tax profits for corporations declined by 0.6% in the first quarter, marking the first drop in a year. The Fed’s preferred inflation metric, the personal consumption expenditures price index (PCE), rose at an annualised rate of 3.3% in the first quarter, slightly lower than the initial projection. The core PCE gauge, which excludes food and energy, increased by 3.6%, a minor revision from the previous estimate of 3.7%. Markets will closely monitor the hotly anticipated PCE deflator readings for April, due later today. The headline figure is expected to have risen 0.3%mom and 2.7%yoy, and the core reading is forecast at 2.8%yoy.
Finally, it seems some crows have taken the phrase “bird brain” and given it a whole new meaning! In a remarkable discovery that might just ruffle a few feathers in the world of animal cognition, scientists in Germany recently found crows do in fact possess counting skills and are able to associate different sounds with numbers. These brainy birds have shown that they can not only outwit many seven-year-olds (“proven” in 2014), but they can now challenge most of their younger siblings with their arithmetic mastery. So, the next time you see a kindergartener excited about their counting skills, you can clap back with a resounding “Caw! Caw! Caw! Caw!”
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Please see today’s daily update from EPIC Investment Partners Received this morning:
Gold is certainly dazzling investors this year. With the precious metal maintaining recent highs, uncharacteristically mirroring equity returns, and surprising commentators better used to obvious ‘safe haven’ status, it is interesting to reflect on its historic place in global financial stability. Perhaps the current phenomenal appetite by the Chinese, looking for a hedge against the potential economic instability of the world’s second largest economy amid a residential real estate crisis, reflects more of its traditional place in a financial cycle.
And where does ‘Bobby’ fit in? Sir Robert Peel, as Home Secretary, formed the Metropolitan London Police Force in 1829. The constables were known as ‘bobbies’ or ‘peelers’. Earlier in his career, he chaired the Bullion Committee at Westminster, charged with restoring national finances after expensive wars with France which had forced Britain to depart from the gold standard. The ‘Resumption of Cash Payments Act’ placed the country once more on the gold standard, and despite considerable scepticism, it soon became evidence of Britain’s possession of a sound currency, and economy, for the remainder of the nineteenth century.
His ‘Bank Charter Act’ of 1844 set the limit of how much currency the Bank of England could issue according to its holdings of gold and began the process of centralising note issuance. This became the second pillar of economic stability upon which the United Kingdom relied until 1914.
So, Sir ‘Bobby’ Peel may well have understood the current preoccupation of the Chinese with a dazzling precious metal, at a time of financial, domestic and global instability. He would have been less impressed with the sale of more than half of the UK’s gold bullion reserves between 1999-2002 at an average price of around $275 per ounce! Brown’s Bottom, indeed.
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Please see below this yesterday’s global market round-up from Brewin Dolphin, which was received late yesterday afternoon – 28/05/2024:
The event which seemingly caught the world off guard last week was the announcement of a UK general election, which will be held on 4 July. The papers on Thursday morning were rife with stories of cabinet members being kept in the dark, and many asked why an election would be called now when the Conservatives lag so dramatically in the polls.
Theoretically, an election could have been held as late as next January, but that would have required campaigning over Christmas (which is not something voters would have appreciated). The working assumption had been that the election would take place in November.
Last month, we questioned that assumption:
“…an established preference exists to not have elections coinciding amongst members of the so-called Five Eyes intelligence collaboration alliance (driven by the U.S. and UK and incorporating Canada, Australia and New Zealand). The perception is that a change of power in these countries can complicate their responses to signals intelligence. The UK and U.S. electoral systems tend to mean complete changes in the executive government, rather than the evolving coalitions seen in other countries, which heightens the risk.”
So, there lies a political, or at least non-economic, reason not to have the election in November. Was it meaningful? It hasn’t been cited as such; instead, the decision is rumoured to have been made after the local elections, which were predictably terrible for the Conservatives, but perhaps not decisively great for Labour.
The economic rationale for a July election
Economic motivations seem clearer. The most obvious reason for calling a July election is the inflation rate announced on Thursday morning.
The figures showed a relatively sharp decline in the inflation rate, from 3.2% to 2.3%. This bookended a period in which the UK, which suffered unfortunately high inflation rates for many months, has seen a significant improvement in inflation figures (it peaked at more than 11% in late 2022 and was still nearly 9% a year ago).
The so-called base effect drove the decline in inflation that caused the apparent slowdown. This was therefore more a reflection of last April’s price increases dropping out of the numbers than this April’s price increases being particularly low.
To a lesser extent, the same thing will happen next month, providing a continuing narrative of lower inflation as we approach election day. The controversy is what happens after that, because the strength of services inflation in Wednesday’s report might cause prime minister Rishi Sunak to worry about lingering inflationary pressure, like that seen in the U.S. this year.
Another measure for underlying inflationary pressure is the monthly change in median prices, which has been picking up recently. The other reason for thinking last month that an earlier election might be on the cards was public finances, which were worse than the Office for Budget Responsibility (OBR) predicted at the Spring Budget:
“…these latest data suggest UK finances are getting tight. There will be little point in holding a fiscal event if there is no scope for further tax cuts. If forecasts are excessively optimistic, the risk is that fiscal policy might need to be tightened, a politically unpalatable prospect both parties are hoping to postpone until after the election.”
Another month’s public finance figures were announced on Wednesday. Although they were overshadowed by the inflation news, and then the election announcement itself, they have deteriorated again, and OBR forecasts will need to take account of compensation payments due in respect to the NHS contaminated blood scandal as these become sufficiently certain.
The scope for tax cuts is therefore falling. Meanwhile, growth is relatively good for now, bouncing back from a technical recession in the second half of 2023. Unemployment is relatively low, but jobs growth has been slowing, so there is more scope for joblessness to rise than decline.
So, overall, the economic backdrop for a 2024 election might not get much better than this.
While the rationale for an early election may exist, it doesn’t mean the government will prevail. Indeed, according to polling and election forecasters, a substantial Labour majority seems virtually inevitable.
Both parties will be working on their manifestos, and the changing state of public finances will complicate their efforts, but what do we know about their differences and what do they hope to change?
The dividing lines between the Conservatives and Labour
Labour has proposed several solutions to boost the British economy, including planning reform, better EU relations, the Green Prosperity Plan, and strengthening workers’ rights. It aims to increase funding for the NHS, schools, childcare, policing, and border security. To finance these initiatives, Labour plans to crack down on tax evasion, increase the energy tax levy, reform the non-domicile tax regime, abolish the carried interest loophole, and charge VAT on private school fees.
Labour also pledges to keep corporation tax at 25% and maintain current income and capital gains tax rates.
Labour’s Rachel Reeves aims to balance the budget and strengthen the OBR’s role. However, given the high government interest expenses, the deficit is expected to remain significant, with UK debt potentially rising to 300% of GDP by 2070. Concerns about government finances will persist for policymakers.
When the manifestos are written, likely in two or three weeks, they will be scored by the Institute for Fiscal Studies. It’s common for them both to err on the side of generosity. It’s likely that the gap may be particularly wide this year, and particularly so for Labour.
The Conservative Party has made life awkward for them with popular tax cuts and defence spending commitments, which Labour will have to reverse if it doesn’t want to limit its own initiatives. So far, it has suggested it will keep these commitments.
Since the announcement
Rishi Sunak’s election campaigning has been greatly hindered by the weather. As well as his campaign launch speech, it has also impacted economic statistics. If the prime minister was looking for April’s retail sales to fit the narrative of an improving economy, he’ll be disappointed. Consumers bought around 3% less in April this year than they did last year. Why? Probably because it was the sixth wettest April since 1836, with 55% more rainfall than average and about 20% less sunshine. Not a great shopping month.
Assuming some normalisation in weather patterns, some catch-up spending would see May and June recover some of that lost activity, which could give an impression of economic momentum as we approach election day.
Could there be more sinister weakness lurking behind the weather effects? Consumer confidence seems to have improved over the month, and based on the best data we can access, it seems even with a slowdown in employment growth, aggregate real wage growth is expanding.
Away from the UK
Provisional data for economic performance in May comes from the purchasing managers indices. They show that the UK economy continues to perform ok. Admittedly, the service sector seems to have slowed down markedly during May, but even that slower pace reflects a still-healthy expansion.
Globally, the services expansion still seems to have good momentum. Crucially, the U.S. bounced back with its strongest services business growth in a year.
Services activity has been expanding far faster than manufacturing, where companies have had to work through inventories built up after strong lockdown-driven demand for durable goods. We are hopeful the fourth quarter of 2023 marked the low for manufacturing, and the latest data support the expectation of a continued, if slow, recovery.
The other familiar theme we’ve discussed in these notes is our preference for semiconductors and Nvidia was among the last companies reporting this earnings season, issuing probably the most anticipated earnings release this quarter.
Nvidia is a good example of the real-world economic beneficiaries of the revolution in digitisation and artificial intelligence. Its valuation seems high, but its financial performance is stunning. A year ago, it made $7bn of revenue; the equivalent quarter just reported saw that rise to $26bn. Profits have increased from $2bn to nearly $15bn.
The observation that the U.S. equity market price-to-earnings ratio is at the upper end of its historic range is a fair one, but it has to be seen in the context of the extraordinary companies that have come to dominate the market.
A simple price-to-earnings ratio does not take account of the different pace of growth or the reliability of earnings constituents may have. It partly reflects profit margins but does not demonstrate the remarkable profitability of some members.
There has never been a time when such large companies have been able to grow profits at such an extraordinary pace. That is not to say that all members of the so-called Magnificent Seven are unambiguously positive, but excluding any of them based upon a crude measure of earnings multiples would be unwise
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Please see the below article from Tatton Investment Management providing a brief insight into markets over the past week.
Overview: Nvidia versus the Fed
Having had recovered to previous highs, markets were mostly flat to slightly down overall this week. Despite the surprise election call dominating our headlines, global markets were preoccupied with Nvidia’s corporate earnings and the US Federal Reserve meeting minutes.
In fact, the FTSE 100 barely reacted to the election news at all, with global trends seen as more important for UK stocks than domestic politics. In part this is because little is expected to change. A Labour victory is a practical certainty, but the party’s self-imposed spending rules will limit the economic effects. There may be a small boost to growth from public investment, but the policy change that would actually help – significantly improving trade and customs relations with the EU – is still unlikely. The Bank of England’s interest rate cuts, which will be unaffected by the election, are more important for the medium-term outlook.
In the US, Nvidia’s incredible six-fold jump in profits showed the AI boom is still going. The chipmaker’s earnings were eagerly anticipated, but in the end drowned out by dreary reminders from the Fed that growth brings inflation. The minutes from the Fed’s May 1 meeting noted that “Various participants mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate,”
This spooked investors, but shouldn’t really be a surprise. We know that inflation is a natural consequence of US strength. Price data since the meeting has been more encouraging too, and no one really thinks the Fed will tighten again soon.
Growth and inflation are acting like checks and balances on markets at the moment. Investors naturally get excited about strong business sentiment and profits, but these come with inflation pressures and ‘higher for longer’ prospects for interest rates. The Fed doesn’t actually have to do anything to keep markets from overreaching; the push and pull of growth and inflation expectations does it for them. Decent stock returns, underpinned by earnings growth, are likely in this environment – but melt ups are not. To us, that seems like a reasonable trade-off.
AI Trade Broadening?
“Nvidia day” has become a globally watched event, and the AI chipmaker didn’t disappoint. First quarter revenues were up 262% year-on-year, boosting its stock yet again, taking the world’s third biggest company to an incredible $2.5 trillion market cap. Nvidia is the undisputed champion of the AI craze, jumping from a $1tn to $2tn market cap in just nine months.
This stellar price action has some investors worried about Nvidia – and AI stocks in general – being overvalued. Despite being a landmark year for the company’s earnings growth, for example, Nvidia’s 2023 profits were still below Home Depot and only slightly above Russia’s sanction-hit Sberbank.
A couple of things need bearing in mind. One, stocks can be overvalued even if they possess great underlying potential and their products are genuinely transformative – as exactly happened during the dotcom bubble. And two, overvalued doesn’t always mean a bubble. Stock market bubbles are characterised by exuberance, which in general requires loose financial conditions – and those we don’t have currently.
AI stocks have high valuations, but so do many fast growing US companies – where the popular AI investment plays are. These valuations don’t seem unreasonable compared to the lofty predictions made of generative AI (Goldman Sachs think it will add 7% to global GDP over a 10-year period) and the profit growth already shown by the likes of Nvidia.
Investors are clearly focused on how these technologies will turn a profit, and not just sensationalism. Already we are seeing a broadening of the AI investment theme to second-round beneficiaries, like the materials or energy providers needed for large data centres. Goldman Sachs estimate that power demand from data centres will more than double by 2030, benefitting utilities and those financing power purchase agreements. Investors are focused on long-term opportunities and not just buzzwords. Working out what those profit opportunities are is crucial.
US election: it’s politics, stupid
Despite strong US growth, Americans are unhappy with President Biden’s handling of the economy. 58% disapprove of his policies, according to a Financial Times poll, and only 28% think he has benefitted the economy. Inflation is the biggest concern, as the less well-off are struggling with prices and interest rates more than anyone else. This inequality is one of the reasons many are unhappy despite strong aggregate data.
Another reason could be politics itself. There is a strong correlation between US consumer sentiment and party political allegiance. This is not just about votes, which might flock to whoever is considered to bring the better economic prospects, per the old adage “it’s the economy, stupid”. Party allegiance is much less likely to change – particularly in the polarised US – and it seems to have a big effect on what people think about the economy.
The divide between Democrats’ and Republicans’ economic outlooks more than doubled between the Obama and Trump presidencies, shrinking a little under Biden but staying much wider than before. Year-ahead inflation expectations is the biggest dividing line. Democrats were scared about inflation under Trump but now seem sanguine, while Republicans were completely relaxed until Biden came in and are now very worried about inflation.
Rather than votes being decided by how people feel about the economy, Americans’ views on the economy seem to be about who is in office. Maybe “it’s politics, stupid”. To make things more complicated, the US economy itself is hard to interpret at the moment. Growth and inflation is strong, but rates are uncertain and the signs are hard to put into a consistent narrative.
The political divide in economic sentiment is yet another complicating factor. Republicans are likely to see good news as bad news – fearing growth is inflationary – as we head into November, while Democrats will likely see good news as good news.ypto rally might run out of steam, but it is unlikely to reverse.
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Please see the below article from Evelyn Partners detailing their insights on the recently called general election on 4th July. Received yesterday.
So, how do the parties compare? According to opinion polls, the Labour Party is set to form the next UK government with a comfortable majority. The poor showing of the Conservatives in the May local elections also adds weight to the argument that opposition leader, Keir Starmer, is set to become the seventh Labour Prime Minister, a century after James Ramsay MacDonald became the first Labour Prime Minister on 22 January 1924.
No doubt, investors will be trying to figure out what a Labour government might mean for UK financial markets. Politics matters when it comes to valuing UK equities. For instance, UK stocks suffered a material de-rating in the lead up to and after Brexit, including the political paralysis in the Commons under Prime Minister Theresa May‘s minority Conservative government. During that time, the UK’s stock market’s limited exposure to the rallying technology sector has also contributed to its unloved status with investors.
To get an idea of the potential impact from a prospective Labour government we need to understand the party’s economic agenda. A good starting point is Shadow Chancellor Rachel Reeves’ speech at the annual Mais lecture in March. It largely focused on delivering “broad-based and resilient growth” through greater state involvement in the economy and has some differences from the approach taken under the current Conservative government. The bottom line is that the Labour party wants to raise the growth potential of the UK economy through its economic agenda, which can be largely summarised in two key parts:
Stability and investment: Reeves argues that businesses need economic and political stability to create the conditions to invest with confidence through a policy she’s coined as “Securonomics”. Labour believes that by improving the information flow to firms through “partnership” with the government, as well as providing strategic direction and selective policy intervention, firms will be encouraged to invest their capital. This tailored economic approach for Britain is similar to “Bidenomics” – the flagship policies of President Joe Biden’s administration.
In short, Labour wants to direct business investment to areas where it believes the UK will have a strategic competitive advantage (e.g., green technology); commonly known as modern supply side economics. This is different to the traditional supply side economics championed by former Prime Minister Margaret Thatcher more than 40 years ago where regulations were cut to allow free markets to determine where private investment goes (think of the privatisations of British Telecom and British Gas in the 1980s).
Reforms: Reeves also made clear “the single greatest obstacle to our economic success” is the planning system. She argues that it creates barriers for opportunity, growth and home ownership and Labour will put “planning reform at the very centre of our economic and our political argument.”
Labour intends to address planning obstacles by streamlining applications with off-the-peg processes. Importantly, to address local opposition to planning proposals, Labour wants to devolve power away from the central government. The idea is that regions and local governments are assumed to have better knowledge of their respective areas and are better placed to fast-track high-value applications. While Labour’s policy is akin to the current government’s approach, Reeves wants to make even more progress on devolution. For instance, on planning reform, Labour intends to reintroduce mandatary local housing targets, employ more people to tackle backlogs and bring forward the next generation of “New Towns.”
Labour also wants to reform the labour market by strengthening workers’ rights. This includes banning zero hours contacts, repealing anti-union laws and ending “fire and rehire”. This will be unveiled in an employment bill within the Labour administration’s first 100 days. At this stage, it is unclear what impact labour reforms will have on the employment outlook.
Translating Labour’s policies into economic growth
A new Labour government would face a vastly different backdrop compared to the last one under Prime Minister Tony Blair in 1997 when government debt and the budget deficit were much lower. It’s likely that a Labour government will need to make spending cuts and/or raise tax over the next parliament to stay within current fiscal rules.
Certainly, Labour will be wary that breaking fiscal rules could lead to financial market turmoil: the short premiership of Liz Truss in 2022, when gilt yields soared to leave her economic agenda in tatters is a case in point. So, this will mean that fiscal policy could be a drag on growth and impact the independent Office for Budget Responsibility’s average real GDP growth expectation of 1.6% per annum over the next five years.
Labour aims to raise economic growth to offset the downside to output from bringing in the deficit. This will largely be dependent on encouraging firms to invest their shareholder’s funds in government-directed strategic areas by providing a favourable and stable environment through “Securonomics”.
Labour also expects its planning reforms and decentralisation to help raise workers’ productivity. However, this will be difficult to do when whole economy productivity (defined as output per hour worked) is already so low. It has increased by just 0.6% since 2009, after the end of the Global Financial Crisis (GFC). Austerity, financial sector deleveraging, competition from imports affecting the manufacturing sector and the rising proportion of the workforce on long-term sickness leave are already contributing factors to the UK’s poor productivity. For comparison, productivity rose at an annualised pace of 2.3% from 1971 (when the data starts) to the end of 2006, the year before the GFC started.
How would a Labour government affect the UK stock market?
There is plenty of uncertainty over whether a Labour government delivers on its rhetoric and whether their policies work to support growth, company earnings and valuations. So, we use scenario analysis to assess the impact on our expectations for the long-term returns of UK equities.
Our Head of Quantitative Strategy, Krishna Nehra, estimates a base case of 5.6% (nominal, annualised returns) for UK equities over the next 10 years. This is based on future real GDP growth, valuations and dividend yields. Under a bullish scenario, where Labour lift the UK’s potential growth rate and valuations expand, that would rise to 7%, while a bear case would produce returns of 4.9% per year.
Ultimately, what will probably drive UK equity returns is whether a Labour government can improve the investment landscape for UK companies. In the Mais lecture, Reeves recognised that unlocking private investment requires institutional reform to encourage UK financial companies to invest in productive assets domestically. This will be crucial, as the scrapping of the dividend tax credit by Chancellor Gordon Brown in 1997 led to the share of UK equities owned by pension and insurance companies to fall from around 46% to just 4% currently.
If Labour wins the election, only time will tell if their policies succeed in lifting the economy’s growth rate. However, given the poor state of the UK government’s finances and subdued productivity, it will be a hard task for the next government to achieve.
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Please see today’s daily update from EPIC Investment Partners Received this morning:
Nvidia’s stock elicits polarised opinions, as its exponential revenue growth trajectory creates ambiguity between hype and value. Sceptics cite the company’s lofty price multiples as indications of overvaluation and price bubbles while advocates contend that conventional metrics inadequately assess the potential of transformative technologies to drive growth.
Nvidia epitomises the conflict between traditional valuation methods and the disruptive potential of innovation. As investors navigate this landscape, they must balance scepticism with recognition of the potential for genuine paradigm shifts.
The Fourth Industrial Revolution is currently underway, characterised by the rapid integration and advancement of groundbreaking technologies across various sectors marking a pivotal moment in human history. As innovations in artificial intelligence, robotics, the Internet of Things, 3D printing, nanotechnology, biotechnology, and quantum computing continue to unfold, they are reshaping industries, economies, and societies worldwide.
Nvidia is a core holding in the EPIC global equity strategy because it is positioned at the epicentre of this digital transformation, uniquely poised to reap the economic benefits of this revolutionary era.
In the first quarter ended April 28th, revenue surged 262% year-on-year and crushed guidance figures. Pricing power was also exceptionally strong as adjusted gross margins increased 220bps sequentially to 78.9% ahead of guidance of 77%.
Nvidia’s CEO Jensen Huan stated that demand for both its current Hopper AI platform and its more advanced incoming Blackwell system will both outstrip supply well into next year.
We see further upside ahead.
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Please see below article received from EPIC Investment Partners this morning, which provides a global market update.
This morning, we heard that UK inflation fell to 2.3% in April, the lowest level in nearly three years, as easing energy and food costs provided relief to households. However, the smaller-than-expected decline dampened hopes of an imminent interest rate cut by the Bank of England. Analysts had forecast a sharper drop to 2.1%, leading markets to trim predictions of a 25bp rate reduction as early as next month.
The drop in the headline CPI from 3.2% in March was driven by falling energy bills (a sharp fall in the energy price cap), coupled with the cost of goods declining by 0.8%. Nonetheless, services inflation, a key measure watched by the BoE, came in hot, rising 5.9%, indicating the inflationary bug has spread through the economy. With wage growth also robust, economists warn the BoE may exercise caution at its upcoming meeting, as elevated services inflation poses an upward risk to inflationary pressures in the second half of the year.
Ahead of the figures, the IMF upgraded its UK growth forecast to 0.7% for this year, from 0.5%, estimating a 1.5% expansion in 2025. The organisation expects inflation to near 2% in the coming months, predicting that the BoE will cut rates by as much as 75bps this year and 100bps in 2025, taking rates to 3.5% by the end of next year. The IMF also explicitly warned of further national insurance contribution cuts “given their significant cost.” The Fund also warned that the UK government is not on track to meet its main fiscal rule, i.e., reducing national debt in five years’ time, predicting net debt will continue to rise to 97% of GDP, instead of falling to 93% of GDP as forecast by the UK.
Across the pond, supply chain disruptions continue to plague businesses across the United States, according to a recent survey conducted by the New York Fed. The survey, a follow-up to a similar poll in October 2021, revealed that about a third of service companies and nearly half of manufacturers are still struggling to obtain necessary supplies. This has hampered production, with many firms reducing output and raising prices in response – a troubling development as the Fed battles stubbornly high inflation.
The survey results align with the New York Fed’s Global Supply Chain Pressure Index, which has tracked supply availability since 2021. However, there has been a slight divergence in the past few months, potentially indicating that inflationary pressures tied to stronger demand are building again. This is evident in the rising container shipping rates, with the spot rate for a 40-foot container from Asia to the US West Coast now more than double the level a year ago and nearly triple the pre-pandemic average.
Lastly, for those of you in need of a giggle, the winner of the Beano’s Britain’s Funniest Class competition went to the Year 6 class at Northside Primary School in North Finchley, London:
What’s the hottest area in the classroom? The corner – because it’s 90 degrees.
In response, Mike Stirling, director of mischief at The Beano, said: “Year Six, Northside Primary School found the funniest angle overall and are deservedly now immortalised in Beanotown”.
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Please see below article received from Brewin Dolphin yesterday evening, which discusses new developments in the Middle East and fresh US inflation data.
Overall, last week saw stocks pause for breath. They’ve recovered well after some modest declines in April and bonds have made modest gains too.
Markets have had to digest the news of the death of the president of Iran, Ebrahim Raisi, in a helicopter crash, which follows the ongoing tension with Israel, but markets are doing so with few signs of stress. Whilst tragic, the circumstances around the crash do not seem suspicious. Visibility was poor in a mountainous area. The president is not the commander-inchief; that honour goes to the supreme leader, Ali Khamenei.
The president’s role will now be filled by Vice President Mohammad Mokhber, with elections held within 50 days. As with President Raisi’s election, the candidate list will be heavily filtered. All eventual candidates will have ideological views that maintain the current stance of isolation from the West and favour China.
Meanwhile, from a macroeconomic perspective, last week’s U.S. inflation data was the main focus. As inflation continues to normalise the case for lower interest rates becomes stronger, that in turn supports equities and bonds. The complication with this narrative is that inflation hasn’t necessarily been normalising, it has in fact remained abnormally high.
In a previous weekly round-up, we discussed the assertion that the current level of interest rates is restrictive. While it is likely this is the case, they aren’t clearly or substantially restrictive as some members of the Federal Reserve seem to believe. If that were true, then it would mean inflation would be coming down slowly rather than overshooting, as it has tended to in the past.
A small step in the right direction for inflation
Has last week’s data reinforced or undermined that narrative?
There have certainly been suggestions that the inflation picture is improving. One such suggestion is the fact that the monthly increase in prices has slowed. This is the important core measure of inflation (stripping out volatile prices of items the central bank can’t do anything about), and this was the slowest pace of price increase in four months, and the first time in seven months that the core monthly price move has not been more than forecast. Sometimes, though, movements can be skewed by dramatic movements in individual components.
So, what did the detail of this report tell us?
Following on from some anxiety over growing tensions between Israel and Iran, the oil price had been strong. To see headline inflation slowing when there is a positive contribution from energy is quite unusual. The oil price has since eased off a bit, so unless it recovers it’ll likely be a drag on inflation next month.
The category weighing on prices is durable goods. Durable goods prices have declined every month for almost the last year, and for most of the last two years. This represents the hangover from a massive overspend on durable goods which took place during the lockdown when U.S. consumers had ample cash and time but had relatively few alternative consumption options. Second-hand cars have weighed heavily on this subcategory.
Services are still hot
Beyond goods though the picture is less encouraging.
Services prices are more directly affected by the labour market and fall more squarely in the category of things the central bank can influence. If services prices are rising, then raising interest rates should limit the amount consumers are able to spend.
Services consumption should decline, and services prices should slow or fall.
Alas, services prices are not slowing as much as had been hoped. The special category of core services excluding shelter, which policymakers and investors use to gauge this, rose 0.4% in April. That’s the slowest rate so far in 2024, but it’s more than double the target rate, so some improvement is needed to make policymakers believe inflation is on a sustainable path towards target.
We do assume this will happen though. One of the reasons consumers have been able to keep on spending on services is because of their accumulated savings, but according to estimates by the San Francisco Federal Reserve, these are now fully depleted.
The market cheered this release, which may seem odd given the ambiguous readings on services. But it came at precisely the same moment as a set of downbeat retail sales reports, so for investors hoping to see lower interest rates in the future, there was at least some evidence (although still mainly focused on goods rather than services).
And then there are other signs that interest rates may not be restrictive.
For one, we’ve seen a lot of corporate bond issuance in the early part of 2024. Issuers believing interest rates are going to fall might wait until their borrowing would be cheaper, but more importantly the ease with which the market absorbed this issuance suggests that financial conditions are quite loose.
Move over Lion King, ‘Roaring Kitty’ is back
We then have the bizarre return of the meme stock craze.
Meme stocks were a late 2020 and early 2021 phenomenon which saw a couple of relatively small companies experience incredible levels of price volatility driven by the actions of retail investors, aided by the widespread availability of leveraged investments.
YouTuber Keith Gill, known as Roaring Kitty, identified a situation in which hedge funds (one in particular) were speculating on declines in the shares of a particular company whose fundamentals were probably not as bad as they believed.
By investing on a leveraged basis and commenting on what he was doing, and thereby attracting fellow investors, he drove the price upwards.
This was not good news for anyone who had speculated on them declining. They were in a situation where they’d borrowed the shares to sell and were now needing to buy them in order to return them to the lender.
Eventually, for a variety of reasons, the speculation in both directions ebbed away and the prices of both stocks, Gamestop and AMC, declined.
But last week has seen the craziness resume. GameStop was at one time 200% higher, whereas AMC rose 300%, but both have since fallen sharply.
It might be surprising that meme stock mania has returned given the number of investors who were tempted into the speculation last time, only to suffer significant losses. But what is more surprising is what sparked the latest rise and fall.
It was prompted by Keith Gill posting an image on his social media of a video game player, leaning forwards. This single post added billions of pounds of implied value to the shares of this company, despite not really containing anything approximating an endorsement.
The original meme stock wave was partly ascribed to people having lots of time and money during lockdowns, but the economy has reopened and consumers are supposed to be tightening their belts. Perhaps this wave of apparent stock market speculation is consistent with an environment of restrictive interest rates?
China struggles on
Finally, it’s worth mentioning Friday’s economic data out of China.
Chinese shares have been terrible performers for the past six years, with only the occasional short-term rallies. Their most recent low was in mid-January and since then they have rallied 35%. But why is this?
It’s not because of the strong Chinese economy. In fact, it’s likely the opposite.
Friday’s data continues to show China struggling. Retail sales are slumping and a modest recovery in industrial production was driven by overseas demand. Consumers are suffering because the value of their principal wealth, their houses, has fallen by an average of 7% over the last year. The main concern is that because so many properties are empty, prices are likely to continue to significantly decline.
To date, property support measures have come via demand support mechanisms – directing more credit to developers to finance the completion of existing projects (good for economic activity but intensifying oversupply) and stimulating demand by cutting mortgage rates and relaxing purchase controls.
However, banks still don’t want to finance the new developments which would normally attract a lot of funds from pre-sales. Households understandably don’t want to purchase unfinished homes from developers, even at lower prices.
China’s Politburo has suggested it’ll address oversupply by taking properties out of the market. Media reports suggest that officials are considering “having local governments across the country buy millions of unsold homes,” and policymakers are considering creating a national real estate investment vehicle to acquire and revitalise unfinished properties across the country.
These proposals are promising, but a lot will depend on how forcefully they are implemented and how purchases will be financed. The size of the property overhang is enormous, and any purchased units would need to be maintained or see their value diminish.
Investors are betting that based upon these challenges, monetary policy will be loosened, and local savers will see the equity market as a better home for their wealth than the struggling property market.
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Please see the below article from EPIC Investment Partners detailing the impact AI has had on the deforestation of the Amazon.
The Amazon is the world’s largest rainforest, in an area so vast it encompasses nine countries, including Colombia and Brazil. According to NASA’s Earth Observatory, it covers around 650 million hectares. The Amazon’s importance to the overall health of the planet can’t be understated.
Yet, deforestation remains an urgent problem. According to research by Amazon Conservation, nearly 2 million hectares of the Amazon were subject to deforestation in 2022, a 21 percent increase from the year before. If deforestation remains unchecked, it could permanently skew the planet’s ecosystem, according to international environmental experts.
So how does anyone tackle a problem so large and complex as trying to reverse deforestation on a major scale? Enter AI. Thanks to the power of data science, machine learning, and cloud technology, experts are developing innovative, collaborative programs that will make recognising deforestation patterns easier and provide tools for policymakers to use that could stop deforestation in its tracks.
A collaborative project called Guacamaya, led by organizations such as the Alexander von Humboldt Institute in Colombia, Universidad de los Andes, and Microsoft AI for Good Lab, is using AI technology to monitor deforestation in the Amazon rainforest. The project employs a three-pronged approach that combines satellite data, camera traps, and bioacoustics analysis to map the amazon. The databases are stored in the cloud and the group is using computational power of Microsoft Azure to design and train the models.
The first phase begins from high above, as satellites from the technology partner Planet Labs PBC provide daily high-resolution images of every single point on Earth. Project Guacamaya is developing AI models to quickly track these images over time, spotlighting areas of illegal deforestation or mining, for which a telltale sign is the presence of unauthorised roads. These models are 80-90% accurate and authorities can be alerted in minutes rather than weeks.
The second phase is AI camera recognition software to track the movement of wildlife through the rainforest. MegaDetector is an AI technology that streamlines a process that used to take days into minutes by identifying and classifying the findings. The last is through sound. Using bioacoustics, researchers can capture sound from the Amazon and use an audio AI model to classify bird and animal species. If a species suddenly appears in a different environment, it could be a sign of deforestation elsewhere.
The result of this project and others in the region is a live, interactive map of the Amazon, highlighting the high-risk areas. The hope is all of the region’s major leaders will come to the table to help build and act on the information for the good of the rainforest.
Please continue to check our blog content for advice, planning issues and the latest investment market and economic updates from leading investment houses.
Please see below, the ‘Monday Digest’ from Tatton Investment Management which analyses global macroeconomic issues currently affecting investment markets. Received this morning – 20/05/2024
Pluses and minuses
Global stocks edged higher last week, led by the US. The S&P 500’s slight gain was enough to push it to all-time highs, making a fairly average week seem like a great one. US equities were propelled by April’s 3.4% inflation figure –the first time CPI didn’t come in higher than expected this year. Markets have become so used to the US economy beating expectations that it feels like an achievement when things are as predicted.
We shouldn’t get too excited about US inflation. Producer prices beat expectations again, suggesting further inflation might be in store. This matches signals from consumer demand and strong corporate profits too. It is a conundrum for markets and the Federal Reserve, which is still signalling interest rate cuts despite continued strength.
Cuts look a sure thing this side of the Atlantic, with lower inflation and weaker growth prospects. But it remains to be seen how deep or fast the Bank of England and European Central Bank’s cuts will be. ECB board member Schnabel warned on Friday that, if the ECBslashes next month as expected, back-to-back moves are unlikely.
BoE dovishness has helped support a strong period for UK stocks, even though the US and Europe still have the upper hand year-to-date. UK investors should bear in mind that portfolio values don’t exactly track the FTSE 100 – which has undeniably been a good thing over the long-term. UK stocks used to be a fairly good barometer of global equity, but have become extremely focused on a few sectors in recent years, so are no longer a great yardstick.
The US’ tariff increase on Chinese electric vehicles and solar panels was one of the week’s most prominent stories. The actual economic effect will probably be small, but it shows continued tension between the world’s two largest economies. EU policymakers are currently staying out of it, but that could change if US tariffs lead to more Chinese‘dumping’ on the global market.
Markets’ middling week reflects these mixed signals. At least portfolio values are at new all-time highs too.
Inflation targeting: why 2%?
Markets were excited about lower US inflation last week, but headline and core numbers remain comfortably above the Federal Reserve’s official 2% target. But the Fed seems keen to press ahead with interest rate cuts regardless.
This has made people question whether the 2% inflation target – adopted by nearly 60 countries – is even the right one. Many think that 2% medium-term inflation is unrealistic, given global macroeconomic trends of deglobalisation, decarbonisation and hangover from the pandemic. Even if it is achievable, is 2% inflation desirable?
In truth, the 2% target is a bit arbitrary. It started from an offhand comment by NewZealand’s finance minister in 1988, from which the central bank crunched a few numbers and started targeting 2% inflation. It seemed to work, so Canada adopted the same target a few years later. The Bank of England adopted an official 1-4% target range after leaving the ERM, which got shifted to 2% and legally enshrined after BoE independence. The BoE governor has to write to the chancellor if inflation strays 1% or more from the target, but the bank’s only explanation for the 2% target is that the government says so. The Fed didn’t even officially adopt a 2% inflation target until 2012.
Some argue that central banks don’t need a specific target. Paul Volcker famously crushed an inflation crisis in the 1980s without a specific target in mind, and the Fed, ECB and BoE have already loosened their own interpretations of a 2% target, with talk of long-term averages and “symmetric” targets. And even if we think inflation should have a target, there is little evidence to say 2% is the right one. IMF chief economist Olivier Blanchard thinks 3-4% is more appropriate, for example.
That being said, the worry is that changing the target now would undermine central banks’ credibility. They are already accused of being ‘behind the curve’ for the current inflation crisis, and changing the target now might look like throwing in the towel. The 2% target might be loosened when this is all over, but don’t expect pronouncements yet.
China building a new world order, but still living in this one
Vladimir Putin was in China this week, strengthening the “no limits” Russian-Chinese friendship. Economic ties between the two nations are now huge, totalling $240bn in bilateral trade last year. China’s trade with the US – an economy nearly 14 times as big as Russia – was $575bn in 2023. In an interview with Xinhua news, Putin beamed: “Today, Russia-China relations have reached the highest level ever, and despite the difficult global situation continue to get stronger.”
Both Putin and President Xi want to challenge US international supremacy, and China now claims to be the largest trading partner of over 120 countries. The country’s drive to create a multipolar world has accelerated in recent years out of necessity, with President Biden expanding the US-China trade wars launched by Donald Trump. On Tuesday, the White House quadrupled tariffs on Chinese electric vehicles, the latest move in a tit-for-tat that has knocked China from the top spot among US trading partners.
But China’s new world order doesn’t mean it has given up on the current one. Beijing launched a case against the US at the WTO in March and has unveiled multiple measures to lure western investors and businesses over the last year. Much of this is out of necessity, with the economy still ailing from domestic demand weakness and Beijing unveiling support measures to turn it around.
Interestingly, currency devaluation has not been one of those measures, despite historical precedence. Keeping the renminbi stable is necessary for attracting foreign investment, but it remains to be seen how much longer the People’s Bank of China can support its currency.
Beijing wants to create a new world order, but it has to live in this one. That is why we will probably see more policy signals that might look inconsistent – like buddying with Russia while trying to appease western investors. It makes China a curious investment proposition. The recent stock market rally shows that Chinese assets can be good for diversification, but politics pose unique risks.
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