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Tatton Investment Management – Tuesday Digest

Please see the below article from Tatton Investment Management, providing a brief analysis of the key stories from global markets and economies over the past week. Received this morning – 02/05/2023

Overview: Let May’s sway guide your way

In recent weeks, it has been hard to ignore the rather directionless and decreasingly volatile bond, equity and currency markets. In particular, credit markets have been very stable or – as one could also interpret them – indecisive. There appears to be lots of investor demand for higher-yielding corporate bond securities without much new supply through issuance matching it. This demand overhang has cheapened credit spreads, or in layman’s terms the premium that corporates pay over governments. With the current total cost of capital at any maturity still higher than the return on capital that many companies appear to expect over the longer term, there is understandably little appetite among corporates to rollover existing debt, let alone create new finance. Instead, they appear to be collectively trying to sit out this yield high, hoping for better financing terms later in the year. We suspect many mortgage holders in the UK with their mortgage terms nearing expiry are having similar thoughts.

Last week’s earnings reports in the UK, Europe and in the US offered more evidence of companies trying to offset weak (often negative) volume growth by raising prices. Unilever and Procter & Gamble were notable in this respect. Companies don’t like to use whatever pricing power they have, but they will if they have to. We should hope that central banks recognise this as the last throes of a cycle, rather than worrying that the latest service sector-driven inflation data is indicative of a spiral.

As we head into the next round of rate decisions, it will be important for companies – and the risk assets that represent them – that central banks tell us they recognise they have done enough and the growing need to change course. The Federal Reserve Open Markets Committee meets tomorrow, the European Central Bank on Thursday, and the Bank of England meets next Thursday. The expectations are that we will get small rate rises but accompanied by the ‘cooing of doves’ – soothing sounds telling us that they expect inflation to cool and rates to be moved to less tight levels as inflation allows. Therefore, contrary to the old stock market adage of ‘sell in May and go away’ it seems to us that ‘let May’s sway guide your way’ may prove far better guidance for investors this year. We will certainly be monitoring central bank messaging, and the market perception of it, very closely.

Cash and money market funds: part 2

We wrote about US money market funds (MMFs) last week, noting how popular and systemically important they have become and what this might mean for capital markets going forward. MMFs are particularly prominent in the US, due to its specific financial and regulatory structure, and have been for many years. Today, money markets are a global phenomenon. As of late 2020, MMFs held over $5.3 trillion worldwide, $3.9 trillion of which came from institutional investors. More recent data is hard to come by, but we can only assume the current figure is much higher, given recent flows into MMFs.

The main selling point for any MMF is its ability to offer cash-like liquidity with better returns than a regular bank deposit. But, given the focus on extremely safe assets, the actual differences in return – both between MMFs and deposits and between MMFs themselves – are naturally quite low. (Though, as noted last week, when base interest rates change as rapidly as they have, banks’ slowness to adjust can create some pretty wide spreads) Even so, not all MMFs are the same, varying on expected duration, risk level, returns or accounting structure.

UK money markets still operate according to European Union regulations, and in the post-Brexit environment, some investors have been concerned about funds under European jurisdiction. For those that wish only to have a UK-regulated fund, there are only a few choices. Almost all funds are under Irish regulation, some under Luxembourg. The main reason appears to be that the jurisdiction can be costly for both investors and fund managers – Ireland remains the cheapest. Interestingly, MMFs in the US can be quite expensive, despite their prominence and popularity with retail investors. Most MMFs in the US now charge around 0.5%, while the median figure is much closer to 0.15% in the UK. This is a positive for us, as Sterling-based investors. MMFs do not compete much on performance, nor would we really want them to, as the incentive to up returns would go against the need for low risk, low volatility. But being competitive on price is exactly what you would want from cash-like assets.

The resurrection of Bitcoin?

It might be surprising to hear that the largest cryptos have had an incredibly good year so far. At the time of writing, Bitcoin is up nearly 80% year-to-date, while Ethereum has jumped more than 60%. Cryptocurrencies suffered a devastating 2022, and Bitcoin and Ethereum are both still below half their late 2021 peaks. Still, the current rallies are impressive, all the more so given the wider market challenges. Bitcoin’s rebound coincided with the US government’s decision to bail out SVB and Signature Bank depositors. Since, prices have climbed to more than $30,000 per token in mid-April, a level it has bounced around since.

Some of that renewed optimism is because of expectations of looser monetary policy from the Fed in reaction to the banking sector concerns. Many analysts have posited that the crypto world still has a tight correlation with global (and particularly US) money supply growth. But industry insiders also point to the slower rate of Bitcoin mining – the process by which new tokens are produced – as a longer-term reason for price growth. In a year’s time, the world’s biggest crypto is set to go through another round of ‘halving’. This is the process every four years that cuts in half the amount of reward Bitcoin miners receive for their work. It is designed to eventually limit the total Bitcoin supply to 21 million tokens. Prices hit new records after each of the last three halving events, and analysts estimate that only 50% of the upcoming supply reduction is priced in, based on previous cycles. While this might not take Bitcoin to a new record – the $69,000 achieved in November 2021 – analysts think $50,000 is an achievable target.

Although advertised as a long-term alternative to fiat currencies, Bitcoin has mostly traded like a speculative risk asset. Indeed, Morgan Stanley notes that the last 10 years for Bitcoin mirror the behaviour of gold prices in the 1970s, when exchange rates became free-floating, asset price speculation was rife, and the price of gold rose by several orders of magnitude. The similarities with gold hint at a deeper problem with Bitcoin as a functional currency. Halving means Bitcoin is by its very nature limited in supply, which gives holders a huge incentive to hold onto their tokens rather than transact them, as they are likely to increase in value. But transaction is one of the key functions of a currency, and so this disincentive could be Bitcoin’s undoing, whereas Bitcoin’s younger sibling Ethereum is not limited in supply.

One of the reasons gold did so well in the 1970s was that holders of seemingly weaker currencies – those from less-trusted nations and markets – had a huge incentive to buy it before their savings depreciated. A similar dynamic seems to be happening with cryptos increasingly being used as alternatives to Emerging Market (EM) currencies, as recently evidenced by Argentina’s letter of intent to the International Monetary Fund in March, which effectively admitted that EM investors see Bitcoin or Ethereum as more credible than some of the regional currencies. Chinese corporations and wealthy individuals have a longstanding desire to move money out of government control, so given the market hype around China this year, this could go some way to explaining Bitcoin’s recent incredible strength. It could even provide a crucial backstop to Bitcoin’s value in the months ahead. The crypto rally might run out of steam, but it is unlikely to reverse.

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Alex Clare

02/05/2023

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Invesco – UK elections: Sunak’s big test, Starmer’s vision and implications for markets

Please see below Invesco article regarding the upcoming UK local elections. Received today -28/04/2023.

How will the elections impact UK markets?

UK politics and the UK economy are not the same as UK equity markets. Only around 25% of revenues in the FTSE All-Share come from the UK.

“Put simply, the outcome of the May election in Barnsley will have no discernible effect on the prospects for AstraZeneca’s world leading immuno-oncology pipeline; the size of the swing in North Tyneside will not affect sales of Unilever in Indonesia. Yet together these two companies alone comprise almost 12% of the FTSE All-share index,” said Martin Walker, Invesco Head of UK Equities.

That’s not to say we are in any way complacent about different prospects of businesses under future Conservative or Labour governments.

“It’s easy to see how policy on, say, energy supply, provision of utilities in general, or housing policies might potentially cause winners and losers, depending on the outcome of the general election. Indeed, our own investment analysis already factors in where we see opportunity and risk under different scenarios. As fund managers, our job is to stay alert – particularly at a time of heightened volatility,” Walker said.

When is the next UK election?

Voters across 230 English local authorities will head to the polls on Thursday 4th May. About 8,000 council seats are up for grabs across a mix of metropolitan boroughs (traditionally Labour areas) unitary authorities (where Labour is expected to make gains) and district councils (traditionally Conservative areas). The last time these seats were elected was pre-Covid, in 2019, when Theresa May was Prime Minister, Jeremy Corbyn was Labour leader and Parliament was heading for a Brexit deadlock. Then, the Conservative lost more than 1,300 council seats. This was their worst local election result since 1995 – while Labour lost 80 and the Lib Dems emerged with more than 650 gains. The National Equivalent Vote share had Labour and the Tories tied neck-and-neck on 31%, with the Lib Dems winning 17%.

Political momentum with Sunak

The political momentum currently lies with Sunak. After a torrid first 100 days in office, Sunak has begun to make some political headway. 

“Agreement of the Windsor Framework, stronger relations with the EU, a well-received Spring Budget and the handling of the collapse of Silicon Valley Bank’s UK branch have strengthened his leadership after a rocky start. As a result, his stock with the Tory grassroots has risen,” said Hook.

And voters are noticing too. Sunak is on a par with Keir Starmer on the question of who voters think would make the most capable Prime Minister; and Labour’s average poll lead over the Tories is down by 5 points since January.
 

Starmer’s task: demonstrate a decisive vote share lead

Sunak’s progress shouldn’t be overstated. A 15-point lead in a general election would deliver Starmer a substantial Parliamentary majority. Nonetheless, Starmer is under pressure to show that a poll lead translates into real votes at the ballot box.

Rather than council gains / losses, the key figures to watch, will be the projected National Equivalent Vote (NEV) figures from local elections experts Colin Rallings and Michael Thrasher – which calculate support for each party as if the elections were taking place in every part of the country. As a guide to interpreting Labour’s performance:

  • Minimum hurdle: take the mantle of the largest party in local government – a title held by the Tories since 2003.
  • Cause for concern: <6 point lead (NEV) over the Tories – suggests Labour are struggling to convert some poll support into votes.
  • Good: 10+ point lead (NEV) over the Tories – a feat Labour last managed in 1997, would show Labour on course for General Election majority.
  • Excellent: 15+ point lead (NEV) over the Tories – on course for a landslide majority.

How does industry view Starmer?

“In our discussions with the bosses of leading UK companies, it’s clear that there’s a dialogue with the government on matters of importance. Governments (of any colour) understand they need to have a performing banking sector,” said Walker.

“The sector is a significant contributor to the Treasury through the banking levy and surcharge. Our most recent discussions have highlighted that banks and financial services companies are already engaging with Starmer and Shadow Chancellor of the Exchequer, Rachel Reeves.”

In the outsourcing sector, an area of ‘hi-touch’ with central and local government, companies are saying that they’re working on engagement ahead of the 2024 election, and that although governments change, the challenges remain the same. One company pointed out: “the language from Starmer around working with the private sector and partnerships is positive. The depoliticising of the support service relationship is important.”

Segment view: Pensions

The UK pension sector is one of the largest in the world – approximately £1.7 trillion in defined benefits pension scheme assets are on UK companies’ balance sheets, according to McKinsey data from March 20231. The sector experienced significant turmoil when Truss announced her ‘mini-budget’ in September last year2.

“After the political turmoil of the last year, a period of relative stability is much needed. The local elections are a good reminder that all politics is local – and the supply of quality, affordable housing remains one of the most pressing needs facing communities across the country. The political focus is necessarily on provision of social housing, but the reality is that more housing of all tenures is needed – and the private rented sector uniquely fulfils strong demand, government policy and investment returns.”

Stuart Boucher, Head of Local Government Pension Schemes, Invesco

Conservative MPs aiming for re-run of 1992

“Tory MPs are bracing for a loss of hundreds of council seats, if not more. But with the PM’s growing reputation for competence and the apparent ‘softness’ of Labour’s lead, they can also see a narrow path to an unlikely election win in 2024,” said Hook.

If, in a year’s time, inflation is substantially lower, economic growth higher, EU relations stronger and public sector strikes are in the rearview mirror, Tory MPs are hoping that voters might just give a less fractious Conservative Party another look. As such, they’re hoping the next election could be more like 1992 than 1997.

Macro view: Inflation

“UK consumer price inflation was reported to be 10.1% in March. Though down from the October peak of 11.1%, this remains uncomfortably high for the Bank of England. However, with natural gas prices down sharply (among other commodity price declines) and sterling strengthening, I suspect that Sunak’s target of inflation halving during 2023 is likely to be met. This should allow the Bank of England to signal an end to tightening around the middle of the year.”

Paul Jackson, Global Head of Asset Allocation Research, Invesco

Starmer’s challenge: define his vision

For Starmer, whatever the result, pressure will grow for him to set out a more detailed alternative vision for the country.

“Starmer’s core challenge is how to articulate a vision for stronger public services when the public finances are already stretched,” said Hook. “Pledging tax rises on higher earners risks undermining his claim to have pulled Labour back to the centre ground; but higher borrowing raises the spectre of a repeat of the market reaction to Liz Truss’s brief premiership.” 

“The third option,” Hook added, “to generate higher revenues from higher growth, would take time and mean Labour are limited in articulating a radical alternative to the current government. This would mean the election could increasingly become a contest between the party leader viewed as most competent: Sunak or Starmer.”

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Adam Waugh

28/04/2023

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Brooks Macdonald – Daily Investment Bulletin

Please see below todays (27/04/2023) Daily Investment Bulletin from Brooks Macdonald:

What has happened

US technology shares had a good day yesterday, helped by strong results in the sector. Weighing against this positivity is ongoing concerns around the US regional banking sector which has remained in focus. Ultimately the bearish sentiment won out, with the equity market falling on the day.

US regional banks

First Republic was down an additional 30% yesterday with the share price hitting an all-time low. To show how much equity value has been destroyed, the bank had a market capitalisation below $1bn at one point yesterday, that’s from a peak of just under $40bn. First Republic are reported to be looking for support from the large US banks, emulating the deposit support they received during the March crisis. It appears increasingly likely that if the bank cannot find support from the private market it would need to go to the FDIC for support. The FDIC are alleged to have threatened to downgrade First Republic’s rating if a private deal is not forthcoming. Such a downgrade would limit the bank’s access to the Fed’s liquidity facilities and would likely catalyse another crisis of market confidence. All of this is reoccurring at the same time as the Fed is in its communication blackout window ahead of the upcoming interest rate decision. Given the uncertainties the market downgraded the chance of a 25bp interest rate hike below 75% at one point yesterday.

Technology

One of the positive stories within markets has been the robust earnings of technology heavyweights. The software sector was up over 4% yesterday, outperforming a falling market, as Microsoft surged over 7% due to better than expected results that showed the company’s cloud unit grow revenue by over 30%. After the US closing bell Meta delivered its results, also coming in above market expectations which will help support the wider technology sector in today’s trading.

What does Brooks Macdonald think

While the tug of war of market sentiment is largely taking place between stronger tech earnings and weaker US regional banks at the moment, the US debt ceiling is not far from investors’ minds. Republican House Speaker McCarthy tweaked his proposed debt ceiling bill which passed through the House yesterday but will fail at the Democrat controlled Senate. The bill represents the starting gun on negotiations which could create a significant market risk over the summer.

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Carl Mitchell – Dip PFS

Independent Financial Adviser

27/04/2023

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Brewin Dolphin – Markets in a Minute

Please see below article ‘Markets in a Minute’ from Brewin Dolphin providing an update on markets and econominc news. Received late yesterday – 25/04/2023.

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Adam Waugh

26th April 2023

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Brooks Macdonald – Weekly Market Commentary

Please see the below article from Brooks Macdonald providing their Weekly Market Commentary. Received yesterday afternoon 24/04/2023.

Fears over US economic weakness created additional volatility last week as investors returned from Easter breaks

After markets became increasingly concerned about weakness within economic growth last week, this week has a series of US data points to ensure economic momentum stays centre stage. Last week equity markets were broadly flat with bond yields moving higher as investors ratcheted up the probability of a May US interest rate hike despite mostly weaker US economic data.

This week sees some major US data releases include the US Federal Reserve’s (Fed’s) preferred inflation measure and Q1 Gross Domestic Product (GDP) 

Thursday sees the release of the US Q1 GDP print which is expected to show that the economic expanded at 1.9% on an annualised basis during the quarter. This compares to a rate of 2.6% in the last quarter. With January and February’s consumer spending buoyed by warmed than expected weather, economists are expecting a softer March which will drive this fall in the rate of GDP expansion. On Friday the release of the core Personal Consumption Expenditure (PCE) report, the Fed’s preferred inflation measure, will contain the personal consumption and spending numbers for March which will confirm whether the US consumer has lost some of its strength from the start of the year. Europe also sees a mix of growth and inflation data this week with the GDP and CPI releases for both Germany and France coming alongside a number of consumer and business confidence surveys. 

Alongside the economic data, investors will also be able to test consumer demand through the earnings of US corporates such as McDonald’s, PepsiCo, Coca-Cola and Hilton this week. This week also sees the release of Q1 earnings for Credit Suisse and UBS, the first results since the banking turmoil and the merger of the two Swiss banks. The key items to watch will be the extent of depositor and wealth management withdrawals and how this has impacted the two banks’ loan-to-deposit ratios.

The Bank of Japan’s first policy meeting under Governor Ueda also takes place this week amidst growing Japanese inflation

The next Bank of Japan policy meeting takes place this week and will be the first meeting for the incoming Governor, Kazuo Ueda. This comes at a time when market participants increasingly expect the Bank of Japan to abandon or revise some of its policy tools such as yield curve control, forward guidance and quantitative easing. Some form of policy review is likely given inflationary pressures appear to be building however the new Governor may wait until the summer before any tweaks. Over the course of this week we also see Japanese labour data, retail sales and the Tokyo Consumer Price Index (CPI) release so plenty for Ueda to consider.

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Alex Clare

25/04/2023

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Invesco: Will Fed hawks go too far in their inflation fight?

Please see the below article from Invesco received over the weekend:

I’ve just returned from my first trip to Asia since the pandemic, where I was honored to be asked to present at a conference. I’d forgotten how long the flights are, and how the onboard movies are critical to passing the time. On one leg of my journey, I counted 12 superhero movies offered on one flight. Thanks to my insomnia, I wound up watching five of them. A pervasive theme, which I never really paid attention to before when I watched these movies with my kids, was the idea that superheroes have enormous power, but sometimes they can make mistakes in using that power — with very significant repercussions. Another theme is that reasonable, well-intentioned superheroes can have strong differences of opinion, and it’s much easier to believe you are right than to actually be right.

Maybe these themes really struck me now because I think central bankers see themselves as modern-day superheroes, or as close to superheroes as economies can find. And to be fair, they have resolved major threats to economies in recent years, from the Global Financial Crisis to the pandemic to the UK gilt yield crisis last fall. But as institutions with powerful policy tools, there is a built-in risk that they might make mistakes that are far-reaching and very consequential. We saw that first-hand when US Federal Reserve (Fed) Chair Jay Powell insisted that inflation was transitory and chose not to start hiking rates until March of 2022.

From there, of course, the Fed embarked on an aggressive tightening policy. And while we wait to see the full impact of that policy on the economy, I think the risks are increasing that the Fed could make a mistake in where it goes from here.

Inflation is cooling, but the hawks remain wary

It’s clear that the US economy is cooling, and so is inflation. Maybe not all forms of inflation are easing as quickly as the Fed would like, but they have been moving in the right direction. Even core services ex-shelter inflation, the focus of the Fed’s inflationary concerns, is showing signs of progress: the 3-month annualized run rate is at 4% after peaking at 9.2% last year. And we got a very encouraging March US Producer Price Index (PPI) report, suggesting we will likely see further easing of the US Consumer Price Index (CPI), as the CPI tends to follow the PPI with a lag.

What is not clear is how much damage the Fed has already done to the economy because of its aggressive tightening thus far, much of which has arguably not yet shown up in the data because of the lagged effects of monetary policy. And yet, we’re still getting hawkish Fedspeak:

  • Last week Fed governor Christopher Waller said there has been minimal progress on inflation in the last year and more rate hikes are needed to get inflation under control. He said inflation “is still much too high and so my job is not done.”
  • San Francisco Fed president Mary Daly said, “While the full impact of this policy tightening is still making its way through the system, the strength of the economy and the elevated readings on inflation suggest that there is more work to do … How much more depends on several factors, all with considerable uncertainty attached to their evaluation.”
  • Perhaps more concerning was what we got from the minutes of the Fed’s March meeting: Federal Open Market Committee (FOMC) participants observed that “inflation remained much too high” and that “the labor market remained too tight.” It seems the Fed would likely have hiked 50 basis points had the banking sector mini-crisis not occurred in March.

Luckily, there are some cooler heads that will hopefully have an impact on Fed deliberations. Chicago Fed President Austan Goolsbee said the Fed should proceed cautiously with any more rate hikes given the stress in the banking system, “At moments like this of financial stress, the right monetary approach calls for prudence and patience.”

Other central banks are taking a hawkish tone

The Fed isn’t the only central bank talking hawkishly:

  • European Central Bank (ECB) President Christine Lagarde continues to share her concerns about inflation. Last week she warned that she expects price pressures to remain high for some time. And now the ECB is considering another “jumbo” rate hike at its next meeting. Don’t forget the ECB is also busy working to rapidly reduce the size of its balance sheet.
  • Last week Bank of England Governor Andrew Bailey assured that the mini-banking crisis would not have an impact on the path of rate hikes: “What we have not done — and should not do — is in any sense aim off our preferred setting of monetary policy because of financial instability. That has not happened.”

I think the Fed poses the most danger to the US economy given how much tightening it has done and given the significant economic weakening that has already occurred, as we have seen in falling Purchasing Managers’ Indexes. But other central banks that continue to tighten in this environment also pose a risk to their respective economies. We just don’t know how much damage has already been done. This adds to the uncertainty around what central banks will do next. As San Francisco Fed President Mary Daly made clear, “…  there are good reasons to think that policy may have to tighten more to bring inflation down…But there are also good reasons to think that the economy may continue to slow, even without additional policy adjustments….” Or as Christine Lagarde said in an interview on Sunday, “… we are faced with high uncertainty because of multiple factors, you know, from all corners of the world.”

The impact of aggressive tightening

Besides the contributions it has made to the mini banking crisis, the Fed is causing other problems too as a result of its aggressive tightening. For example, net interest on public debt has risen 41% thus far in fiscal year 2023 versus fiscal year 2022 largely because of the increase in interest rates. Discussion of this topic might not be found in the FOMC minutes, but it’s an important one since money spent servicing debt is money not available to be spent in other, more productive ways. I can’t help but wonder that, with superheroes like this, who needs supervillains?

Then there is the uncertainty around the debt ceiling. We have to worry that if an agreement is not reached expeditiously, we may have a repeat of the summer of 2011 — or worse. I hope that’s not the case, but in this politically charged environment, it could be.

Implications for investors

As I conclude this commentary, it occurs to me that it’s been another week in which I’m writing about central banks. I realize my central bank commentary series is starting to rival the number of superhero movies I’ve seen — but unfortunately, the reality is that central banks are still largely controlling the narrative when it comes to both economies and markets.

In my view, the current environment with central banks argues for defensive positioning in the very near term, especially in the US, for those who are tactical allocators. However, for those who are strategic allocators, I believe it’s time to start looking for opportunities to selectively add to one’s portfolio.

Whether you are a tactical or strategic allocator, there are two asset classes I believe may perform well in the near term and the longer term:

  • Within equities, I’m most positive on the technology sector. Many tech companies are reducing costs, which should help take pressure off profit margins. In addition, many tech stocks offer secular growth at a time when growth is scarce, which should make them more popular with investors.
  • Within fixed income, I’m most positive on investment grade credit. High quality debt with relatively high yields makes sense to me in this environment.

With both these views, the main short-term risk, especially for tactical investors, is that continued hawkishness by the Fed in excess of what markets already expect could lead to some renewed upward pressure on long-term interest rates, which in turn could drive longer-duration assets like tech equity or investment grade credit prices somewhat lower. But with inflation cooling and the economy slowing, the Fed should be at or near the end of the tightening cycle, which should limit these risks.

In general, though, I favor being diversified across and within the three major asset classes: equities, fixed income and alternatives.

I believe it also makes sense to be globally diversified across asset classes. Western Europe is further behind in its rate hiking phase than the Fed, which suggests that US fixed income and longer-duration sectors of US equities (like technology) are probably better positioned than European fixed income or growth/tech equities.

China is in a much earlier stage of its reopening and recovery, with much less inflation risk (since its government didn’t do major job protection programs, fiscal transfers, or monetary easing in the way the West did, accounting for a less aggressive reopening rebound). The People’s Bank of China can therefore afford to be much more dovish, pointing to a better overall financial environment than in the West. This environment suggests “risk on” positioning may perform better.

Emerging markets as a whole are in a more advanced phase, but with major differences, calling for diversification and active country selection and risk management: Some are arguably at or near in the end of tightening in many cases (such as India), though there are others where more hiking may be needed (South Africa for example, and perhaps parts of Central/Eastern Europe, which still have very high inflation and are probably likely to keep leading the ECB in hiking) or where policy and political uncertainty point to sustained ultra-high rates (like Brazil).

The key for investors is to understand where the risks are, both upside and downside. Right now, many of those risks are coming from central banks. While well intentioned, central bankers don’t often merit superhero status. Don’t forget that central bankers are only human, and they can often be driven by the same emotions that can hobble investors from achieving their goals, such as pride and fear. Central bankers only carry briefcases and financial calculators, not magic lassos and sabers. And while they might wear Canali suits, they don’t wear capes.

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Andrew Lloyd DipPFS

24th April 2023

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Brooks Macdonald – Daily Investment Bulletin

Please see below, the ‘Daily Investment Bulletin’ from Brooks Macdonald providing a brief update on markets and economic news. Received late yesterday evening – 20/04/2023

What has happened

Some volatility returned to equity markets yesterday even though US equities managed to rally later in the day to close broadly flat. The catalyst for this was stickier-than-expected inflation data as well as the continuation of the early theme of mixed Q1 US earnings. The UK inflation report, which beat to the upside on both headline and core readings started the more downbeat market tone.

UK impact

UK gilts underperformed again on Wednesday in the aftermath of the inflation report after seeing yields rise on Tuesday after the higher UK wage growth data. A 25bp interest rate rise in May is now fully priced in by the market, the first time this has been the case since February, before SVB/Credit Suisse entered the headlines. Despite the Bank of England continuing to stress that the UK does not require materially higher rates to bring inflation under control, market participants are increasingly sceptical that this is the case in light of the emerging data. The UK data also impacted other geographies with the chance of a 50bp May ECB rate hike being upgraded leading to European bond yields rising as well.

Credit conditions

We will need to wait until next month to see the release of the Senior Loan Officer Survey, a Federal Reserve survey of large banks to gauge bank lending activities, however, yesterday did see the release of the Fed Beige Book. The Beige Book provides a collection of comments/supporting data from the Federal Reserve’s district and contains comments on credit conditions. New York reported that ‘Credit standards tightened noticeably for all loan types, and loan spreads continued to narrow. Deposit rates moved higher.’ That said, many responses did not see large changes, and California reported signs of stabilisation after being at the centre of the turmoil last month. Market measures of financial stress also suggest that much of the tightness caused by the banking issues in March have been reversed but the Senior Loan Officer Survey will be an important data point when released next month.

What does Brooks Macdonald think

While financial market conditions appearing to improve as investors look beyond the banking crisis is a positive, it does mean that if the market is no longer tightening conditions, central banks will need to do the heavy lifting. Yesterday’s move higher in gilt and European yields reflects the reality that central banks will likely now need to tighten more than investors expected a few weeks ago.

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Alex Kitteringham

21st April 2023

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Geoff H – Beverley

I made an investment with People and Business two years ago, in that time I have found them very efficient and helpful. I have dealt with Carl Mitchell from the beginning of our investment, which has yielded 16% through all the problems inflation etc. Carl is very professional, easy to deal with and cannot do enough to help you. I would recommend Carl and People and Business to anyone who wants to make an investment.

Geoff H – Beverley – 18/04/2023

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Stocks rise as recession fears ease

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

Stock markets rose last week as signs of economic growth and easing inflationary pressures boosted investor sentiment.

The FTSE 100 ended its holiday-shortened trading week up 1.7% after figures showed the UK economy rose above its pre-pandemic levels in February. The pan-European Stoxx 600 also rose 1.7% following increases in eurozone industrial output and investor morale.

In the US, the S&P 500 and the Dow advanced 0.8% and 1.2%, respectively, as the annual rate of inflation slowed to its slowest pace since May 2021.

In Japan, the Nikkei 225 surged 3.5% after Warren Buffett said he intended to add to his investments in Japanese stocks. China’s Shanghai Composite edged up 0.3% as investors weighed a surprise 14.8% year-on-year increase in exports against softer-than-expected inflation.

Investors await slew of quarterly earnings

Stock markets had a quiet trading day on Monday (17 April) as investors braced themselves for this week’s raft of US quarterly earnings reports. Bank of America, Morgan Stanley, Netflix and Tesla are all due to release their results this week.

In economic news, a report from the Federal Reserve Bank of New York showed factory sector activity in the region significantly improved in April. The NY Empire State manufacturing index rose from -24.6 in March to +10.8 in April, smashing forecasts of -18 and marking the first increase in five months.

UK economy rises above pre-Covid levels

Figures released by the Office for National Statistics (ONS) last week showed the UK economy has finally risen above its pre-Covid levels. Although gross domestic product (GDP) was unchanged between January and February, revisions to data from previous months meant the economy ended the month 0.3% bigger than in February 2020.

February’s reading was held back by strike action in the services sector and was below the 0.1% expansion forecast in a Reuters poll. However, an upwardly revised 0.4% expansion in January led several commentators to speculate that the economy is unlikely to have contracted in the first quarter. Only a month ago, the Office for Budget Responsibility said GDP would shrink by 0.4% in the first quarter.

US inflation falls to 5.0%

Over in the US, investors were encouraged by figures that showed consumer inflation eased in March to its slowest pace since May 2021. The consumer price index (CPI) rose by 5.0% year-on-year, down from 6.0% in February, according to the Bureau of Labor Statistics.

Energy prices decreased 6.4% year-on-year, with gasoline and fuel oil falling 17.4% and 14.2%, respectively. In contrast, electricity rose 10.2% over the year, while natural gas grew by 5.5%. Food at home prices rose 8.4%, whereas food away from home prices rose by 8.8%.

Core inflation (excluding food and energy) rose by an annualised 5.6% in March. The largest driver was shelter, which grew 8.2% over the year and accounted for over 60.0% of the total increase. Other indexes that saw notable increases included motor vehicle insurance (15.0%), household furnishings and operations (5.6%), recreation (4.8%) and new vehicles (6.1%).

On a monthly basis, headline inflation rose by a lower[1]than-expected 0.1% in March, down from 0.4% in February, while core inflation grew 0.4% in March, down from 0.5% in February.

Producer prices unexpectedly fall

Further evidence of easing inflationary pressures came from the US producer price index (PPI) report. This showed prices paid by businesses unexpectedly fell by 0.5% in March, bringing the year-on-year increase to 2.7%, the smallest annual rise since January 2021.

Two thirds of the decline was attributed to falling goods prices, particularly energy, which decreased 6.4%. In contrast, when excluding food and energy, goods prices grew 0.3%.

Services also saw a decline of 0.3% in March, the largest decline since April 2020. This was primarily driven by a 0.9% drop in trade services margins.

Core PPI – which excludes food, energy and trade services – gained 0.1% in March, down from 0.2% in February. On an annualised basis, the index grew by 3.6%.

Eurozone industrial production rises

In the eurozone, figures from Eurostat showed industrial production grew by more than expected in February, thanks to easing supply chain issues and low energy prices. Industrial production rose by 1.5% month-on[1]month, bringing the year-on-year increase to 2.0%.

Further encouraging data came from the Sentix index of investor morale, which rose in April after dipping in March. The assessment of current conditions rose to the highest level in more than a year.

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Chloe

19/04/2023

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Brooks Macdonald – Weekly Market Commentary

Please see the below article from Brooks Macdonald providing their Weekly Market Commentary. Received this morning 18/04/2023.

A slightly lighter economic calendar, but more company results instead this week

Despite a weaker day on Friday in dollar terms, equity markets managed to finish the week in positive territory, as financial stress fears continued to recede after last month’s hiatus. The flipside though, is that markets have been rebuilding expectations around a Fed hike on 3 May when the Fed next meets, with probability of a 25bps hike now at 81. Turning to the week ahead, it’s a slightly lighter economic calendar. In terms of what to look out for, China’s Q1 growth following its reopening will be in the spotlight when it releases Gross Domestic Product (GDP) numbers tomorrow. Elsewhere, investors will be focusing in on labour market and inflation releases from the UK due tomorrow and Wednesday respectively. Over in the US, the Fed releases its latest ‘Beige book’ on Wednesday, where the regional Fed banks gather up anecdotal information on current economic conditions in their areas. With the US Q1 earnings season now underway, company results ramp up with more bank results due this week, including Bank of America, Morgan Stanley, and Goldman Sachs, as well as results from Tesla, IBM and Netflix. Finally, the global flash PMIs for April due Friday will bookend the week, as investors continue to focus on recession risks.

US bank sector results gets off to a good start

Friday saw US bank sector results get underway, with bellwether JP Morgan easily beating expectations. Alongside an expected boost to deposit inflows following customers seeking perceived safety in the bigger banks, JP Morgan also posted a huge jump in its net interest income (which is broadly speaking the difference between what it pays on deposits and earns on loans and other assets). Significantly, JP Morgan CEO Jamie Dimon and his team stressed that the 1Q deposit inflows were not driving its higher interest-income forecast, now expected to be $81bn this year, up from a previous estimate of $74bn, with Dimon saying that “the US economy continues to be on generally healthy footings, consumers are still spending and have strong balance sheets, and businesses are in good shape,” Clearly one bank’s results doesn’t dictate the whole sector, and it’s likely that results from some other US banks, including smaller regional banks in coming weeks might look less robust, but as results go, it was a good start to the earnings season, which investors are watching closely in terms of the expected earnings outlook for this year.

US debt ceiling talks still a tail-risk

Later today sees US House of Representative Speaker Kevin McCarthy (Republican) giving a speech that’s expected to cover the Republicans’ position on the issue. As a recap, the US is expected to come up against the debt ceiling again this summer, and the Republicans have said they want concessions like spending cuts in return for passing an increase. Since the Republicans now have a majority in the House of Representatives, versus a Democrat-controlled Senate, it suggests that there will have to be some concessions from both sides. For the time being, investors on balance seem to be framing these talks as largely political still, but that does leave a tail-risk for markets should the mood on Congress deteriorate.

What does Brooks Macdonald think

Despite firming expectations of a Fed hike next month, markets are still expecting cuts later this year, with the Fed December meeting rate expectation currently at 4.50%. While that’s up a long way from the 3.75% low at the height of the US banking turmoil last month, it is still at odds with a Fed which on balance is likely looking to want to hike and then hold rates at those higher levels. With the next Fed meeting only two weeks away on Wednesday, this week is the last time we’ll be able to hear from Fed speakers before their blackout period begins on Saturday.

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Alex Clare

18/04/2023