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Please see below, Brewin Dolphin’s ‘Markets in a Minute’ update which provides a brief analysis of the key events in global markets over the past week. Received yesterday evening – 12/09/2023

Positive economic data weigh on stock markets

Positive data from the world’s largest economy proved to be bad news for stock markets last week, as investors fretted about further interest rate hikes.

The S&P 500, Dow and Nasdaq slipped 1.3%, 0.8% and 1.9%, respectively, after the US services sector unexpectedly picked up steam in August. Indices were also dragged lower by a slump in Apple shares and an uptick in oil prices.

In Europe, the Stoxx 600 fell 0.7% after gross domestic product (GDP) in the eurozone grew by just 0.1% in the second quarter, down from initial estimates of a 0.3% expansion. Germany’s Dax declined 0.5% as industrial production fell for a third consecutive month.

In China, the Shanghai Composite fell 1.9% after a slowdown in services sector activity added to concerns about the country’s economic outlook. Hong Kong’s Hang Seng finished its four-day trading week 3.4% lower, with markets closed on Friday due to extreme rain.

Germany’s economy to contract this year

Stocks started this week in the green as investors looked ahead to the release of the US consumer price index (CPI) inflation report and the European Central Bank’s interest rate decision later this week. The pan-European Stoxx 600 managed a 0.3% gain on Monday (11 September), despite the European Commission forecasting a 0.4% decline in Germany’s economic activity this year, compared with its previous forecast of 0.2% growth. The commission also cut its growth expectations for Germany in 2024 from 1.4% to 1.1%, and warned of a general slowdown across the EU as a whole.

The FTSE 100 was up 0.6% at the start of trading on Tuesday as investors digested the latest UK jobs data. The unemployment rate rose to 4.3% in the May to July quarter, up from 3.8% the previous quarter. Regular pay (excluding bonuses) grew by 7.8% year-on-year, the same rate as the previous quarter and the highest since comparable records began in 2001.

US services activity hits six-month high

Last week’s economic data indicated that parts of the US economy are performing better than expected and that inflationary pressures are persisting. Concerns that interest rates may need to stay higher for longer weighed on stock and bond prices last week.

Figures from the Institute for Supply Management (ISM) showed US services sector activity unexpectedly rose to a six-month high in August. ISM’s non-manufacturing purchasing managers’ index (PMI) measured 54.5, up from 52.7 in July and well above the 50.0 mark that separates growth from contraction. A gauge of prices paid by services businesses jumped sharply to 58.9 from 56.8, indicating ongoing inflationary pressures.

Elsewhere, weekly jobless claims were lower than expected, suggesting the US labour market remains tight despite previous data showing an increase in the unemployment rate. Initial jobless claims fell to 216,000 in the week ending 2 September, the lowest since February and the fourth consecutive weekly decline.

Eurozone GDP growth revised lower

Figures from Eurostat showed eurozone GDP grew by only 0.1% in the second quarter compared with the previous three months. This was worse than the initial estimate of a 0.3% expansion. Exports fell by 0.7% due to a slowdown in trade with China and a sharp decline in the German car making industry. German industrial production fell by 0.8% in July, driven by a 9% decline in auto manufacturing.

Separate data showed retail sales volumes in the eurozone dropped 0.2% in July, worse than the 0.1% decline forecast by analysts. In Germany, the eurozone’s biggest economy, sales were down 0.8% month-on-month.

UK interest rates ‘nearing peak’

Here in the UK, Bank of England (BoE) governor Andrew Bailey told MPs last week that interest rates were “much nearer now to the top of the cycle”. He said that while there had previously been a period when “it was clear that rates needed to rise”, the Bank was “not in that place anymore”. Bailey also reiterated his prediction that inflation will fall significantly this winter. The Bank is expected to raise interest rates to 5.5% when it meets again on 21 September.

The BoE’s latest survey of businesses indicated that underlying price pressures might be easing. Companies polled in the three months through August expect output prices to increase by 4.9% over the next 12 months, down from 5.2% in the three months to July. CPI inflation expectations for the year ahead also eased to 4.8% from 5.4% in July.

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

Alex Kitteringham

13^th September 2023

Please see this week’s weekly market commentary from Brooks Macdonald providing their commentary on global markets:

• Bonds and equities sold off last week as an oil price rally stoked inflationary concerns
• US inflation is in the spotlight this week as the US releases the latest CPI and PPI numbers
• The ECB is likely to pause its interest rate hikes this week but leave the door open for future rises

Bonds and equities sold off last week as an oil price rally stoked inflationary concerns

While there was relatively little economic data last week, it did not prevent a risk off tone from gathering momentum. Equities fell over the week at the same time as bond yields rose. This week sees a bumper collection of economic data releases as well as the European Central Bank (ECB) meeting.

Inflation is the focus this week with the US Consumer Price Index (CPI) release on Wednesday, eagerly awaited. Whatever the outcome of the release, we will not hear immediately from US Federal Reserve (the Fed) speakers as they are now in a communication blackout. Any deviation from market expectations will, however, play into the Fed’s monetary policy decision next week. After a recent run of disinflationary readings, the headline US CPI is expected to rise from 0.2% month-on-month to 0.6%, with this increased largely attributable to higher natural gas prices. Those higher gas prices will be excluded from the core inflation reading, which is expected to be relatively subdued, but if energy prices remain elevated they will drive second-order inflation in goods and services over time.

US inflation is in the spotlight this week as the US releases the latest CPI and PPI numbers

The Producer inflation number will also be an input into the Fed’s interest rate decision with investors looking closely at the healthcare sub-component which is an important part of Personal Consumption Expenditures (PCE) inflation, the Fed’s preferred measure. Healthcare wage inflation is the concern here as wage growth could increase broader healthcare inflationary pressures after the recent falls. Lastly, we will see a gauge of consumer demand through the US retail sales release which follows a strong July reading. Economists are expecting a degree of mean-reversion after July, with retail sales falling back from 0.7% month-on-month to a less exciting 0.1%. The Fed will also be highly sensitive to this reading as it weighs up the probabilities of a US recession versus a soft landing.

The ECB is likely to pause its interest rate hikes this week but leave the door open for future rises

It is a major week for inflation and economic growth indicators in the US which will set up expectations for the Fed’s meeting next week. This week the ECB will also meet, with the balance of probabilities pointing towards a pause in their interest rate hike cycle. Given inflation still remains sticky in the Euro Area, we expect the ECB to continue with a hawkish tone and frame a pause as a sensible step given the region’s stagnating Gross Domestic Product (GDP) growth, but for the central bank to caution that further interest rate rises are still likely.

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

Andrew Lloyd DipPFS

12/09/2023

Please see the below article from EPIC Investment Partners outlining the key takeaways from the Beige Book that gathers anecdotal information on current economic conditions. Received this morning 08/09/2023.

The Beige Book gathers “anecdotal information on current economic conditions” from each Federal reserve Bank. The key takeaways from the edition released on Wednesday were: Modest growth in July and August; strong consumer spending on tourism, but other retail spending, particularly non-essential, slowed; new auto sales expanded, however, this appeared to result from increased inventory rather than higher consumer demand; improvement in supply chain delays reported by manufacturing contacts across several districts; stable or declining new orders, with shorter backlogs; there remains a shortage of homes for sale;  higher consumer credit line delinquencies; and subdued job growth across the country.

As we have discussed, the report suggested that consumers have exhausted their savings and are relying evermore on borrowing to support spending. Nearly all Districts indicated businesses renewed their previously unfulfilled expectations that wage growth will slow broadly in the near term. Finally, most Districts reported a slowdown in price growth, with a faster decline in manufacturing and the consumer-goods sector.

The report followed a strong ISM Services Index print. Prices paid, employment and new orders all jumped higher in August. Markets appeared jittery over the figures, which they interpreted as interest rates may have to remain elevated for an extended period. Unlike the manufacturing sector which has contracted for 10 consecutive months, the services sector has expanded during 38 of the last 39 months. The boost in services is most likely due to the summer spending on entertainment and ancillary activities; for inflation to fall further, the services sector needs to contract.

As we approach the 19-20 FOMC meeting, we heard from the Fed’s Waller, who is amongst the most hawkish members, who intimated that the Fed may hold rates this month. He said recent economic prints are “going to allow us to proceed carefully,” adding that “there’s nothing that is saying we need to do anything imminent anytime soon, so we can just sit there, wait for the data, see if things continue” on their current trajectory. Meanwhile, Boston Fed president Collins, said she expects the Fed will hold rates at restrictive levels for some time. She added that “we may be near, or even at peak for policy rates”, however, further tightening may be necessary depending on incoming data such as too tight a labour market or inflation that is not slowing enough towards target.

It appears financial markets are not poised for upside risks to inflation, a concern given that oil is trading at year highs, following a collaborative supply cut by Saudi Arabia and Russia. Be prepared for further volatility.

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

Alex Clare

08/09/2023

Please see below, Brewin Dolphin’s ‘Markets in a Minute’ update which provides a weekly summary of the latest news from markets around the world. Received late yesterday afternoon – 05/09/2023

Stocks rise as US labour market cools

Most major stock markets rose last week after US jobs data raised hopes of a pause in interest rate hikes.

On Tuesday, the S&P 500 recorded its best one-day gain since June following an unexpected decline in US job openings. The index finished the week up 1.9%, while the Dow and Nasdaq added 0.8% and 2.4%, respectively.

Indices in Europe also rose as core inflation in the eurozone eased. The pan-European Stoxx 600 gained 0.6%, while Germany’s Dax edged up 0.3%. The FTSE 100 also ended the week in the green, despite another steep decline in UK house prices.

In China, the Shanghai Composite added 1.1% after the government announced measures that aim to bolster the world’s second-largest economy.

UK retail sales bounce back in August

It was a quiet start to the week for investors on Monday (4 September) with US markets closed for Labor Day and very little economic news. Tuesday saw the release of the British Retail Consortium’s (BRC) latest UK retail sales figures, which showed sales rose by 4.1% over the four weeks to 26 August. This was well above the 1.0% growth in August 2022 and the three-month average of 3.6%. Non-food products had their best month since February.

Helen Dickinson OBE, chief executive of the BRC, said the figures reflected the improvement in consumer confidence in August. However, she added that high interest rates and high winter energy bills will put pressure on many households to spend cautiously.

US unemployment rate rises to 3.8%

Last week saw mounting evidence of a slowdown in the US labour market, raising hopes that the Federal Reserve will keep interest rates on hold when it meets later this month. Data released on Friday showed the unemployment rate unexpectedly rose from 3.5% in July to 3.8% in August, the highest rate since February 2022.

The report from the Labor Department also showed employers added 187,000 jobs in August. This was above expectations, but gains for the previous two months were revised lower by a combined 110,000. Meanwhile, average hourly earnings rose by just 0.2% in August, slightly below expectations. The figures came a few days after data showed job openings unexpectedly fell by 338,000 in July to their lowest level since March 2001.

Although the US labour market is cooling, it remains strong. Economists are increasingly hopeful that the Federal Reserve will achieve a ‘soft landing’ for the US economy – where inflation is brought under control without sparking a recession.

US consumer spending accelerates

There was further evidence of a resilient US economy in the latest consumer spending data. Consumer spending, which accounts for more than two-thirds of US economic activity, increased by 0.8% in July, the most in six months, according to the Commerce Department. When adjusted for inflation, consumer spending rose by 0.6%, which was also the largest gain since January. Data for June was revised slightly higher to show a 0.6% increase in consumer spending instead of 0.5%.

UK house prices fall by most since 2009

Here in the UK, figures from Nationwide showed another steep decline in house prices in August. House prices fell by 5.3% year-on-year, the weakest rate since July 2009. In the first half of the year, the number of completed housing transactions was nearly 20% below pre-pandemic levels and around 40% lower than in the first half of 2021.

Robert Gardner, Nationwide’s chief economist, said the relative weakness of mortgage activity “reflects mounting affordability pressures as a result of the sharp rise in mortgage rates since last autumn”.

Eurozone core inflation eases

 Preliminary data released by the European statistics office on Thursday showed that while headline inflation in the eurozone held steady at 5.3% in August, core inflation eased. Core inflation, which strips out volatile food and energy prices and is a gauge of underlying price pressures, fell by 0.2 percentage points to 5.3%.

The figures come ahead of the European Central Bank’s (ECB) policy meeting on 14 September, when it will decide whether to press ahead with further interest rate hikes. As well as a slowdown in core inflation, last week saw signs of weakening economic activity. In Germany, the eurozone’s largest economy, monthly retail sales fell by a worse than-expected 0.8% in July. The number of unemployed people in the eurozone rose by 73,000 in July, although the unemployment rate remained at a record low of 6.4%.

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

Alex Kitteringham

6^th September 2023

Please see this week’s weekly market commentary from Brooks Macdonald providing their commentary on global markets:

• US equities surged last week, supported by a fresh adoption of the ‘soft landing’ narrative
• The US employment saw a surprise increase in the unemployment rate while wage growth slowed
• Chinese stimulus helped support the region’s equity market as policymakers seek to boost economic growth

US equities surged last week, supported by a fresh adoption of the ‘soft landing’ narrative

The US equity market climbed around 2.5% last week, its strongest weekly performance since June. European equities also rose but lagged behind the US rally as US mega-cap technology stocks supercharged the US market return. US bond yields fell last week on the back of weaker-than-expected economic data however this weekly fall masks a degree of volatility last Friday.

The US employment saw a surprise increase in the unemployment rate while wage growth slowed

While the headline number of new jobs slightly beat market expectations, the last two months of data were revised lower, more than offsetting the small beat. Recent nonfarm payroll releases have been consistently downgraded in future months which casts doubt on the true strength of the August numbers. One of the significant changes for this report was a pickup in the headline unemployment rate which moved to 3.8% versus expectations, and the previous reading, of just 3.5%. The driver of this was a large increase in the number of individuals looking for work in August. In terms of the all-important wage growth numbers, average hourly earnings fell more than expected, declining to 0.2% month-on-month compared to 0.4% the previous month.

In aggregate, the employment report showed a deceleration in labour market tightness which is welcome news for the Federal Reserve. That said, whether this softening gains momentum or not will play a large role in determining whether the US economy undergoes a soft or hard landing. Adding to the mixed data that the market has to contend with, the US Institute for Supply Management (ISM) manufacturing survey was stronger than market expectations even though the sector remains in contraction. Of more concern will be the pick-up in the prices paid sub-component which could mean that goods disinflation, a central driver of the recent falls in US consumer price index (CPI), may be moderating somewhat.

Chinese stimulus helped support the region’s equity market as policymakers seek to boost economic growth

This week will start slowly with the US on holiday on Monday. This week the focus will be on any hint of further Chinese stimulus with investors responding positively to the recent efforts to stimulate economic growth. We will also see the release of the US ISM services survey as well as hear from the Reserve Bank of Australia where the central bank is expected to pause its interest rate hikes.

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

Andrew Lloyd DipPFS

05/09/2023

Please see the below article from Tatton Investment Management providing a brief analysis of the key factors affecting global markets. Received this morning – 04/09/2023.

Overview: New school term has the US top of the class

Summer is officially over, but we are none the wiser regarding the direction of the economy. Or are we? Generally, the inflation backdrop continues to ease, although not fast enough for comfort according to Bank of England (BoE) chief economist Huw Pill. He wants interest rates to remain high and steady, and suggests policy should be kept steady at restrictive levels rather than sharp hikes followed by rate cuts. Pill argues the tight jobs market allows workers to push up wages which have previously been eroded by inflation, creating a dynamic that leads to inflation persistence. While Huw Pill may worry about the UK’s inflation persistence, the much more vibrant US economy would be far more likely to have a problem with sticky inflation as the labour market would remain tight. US bond yields may have fallen back recently on slight economic sogginess but we think it unlikely they will go too much further. Given the lag in economic dynamics in Europe and the UK, they have got more room to ease here.

So, are we any wiser at the end of months of seemingly economic procrastination, plateauing of interest rates, disappointing China news and fearing about imminent recession? Well, the general economic development has by and large withstood the monetary onslaught much better than expected while inflation has come down progressively. This tells us that despite widespread fears that after ten years of ultra-low interest rates, the return of ‘old normal’ levels of interest rates would spell imminent economic and market disaster are probably premature. As a result, markets have been much like the past summer months in the UK – not so hot but not disastrously cooler. Companies and households have been prepared for difficulties but it hasn’t been so difficult. Let’s hope the autumn is full of warmth, mists and mellow fruitfulness.

Life and debt: an era of high public borrowing 

At August’s conference in Jackson Hole, Wyoming, central bankers got existential. According to European Central Bank (ECB) President Christine Lagarde, worldwide trends toward tighter labour markets, regionalisation and the green transition have fundamentally changed the way monetary policy works. In her words: “There is no pre-existing playbook for the situation we are facing today – and so our task is to draw up a new one”. Something this playbook needs is a way to deal with significantly higher public debt piles. The hope was that government debts would come down once the world returned to ‘normal’ after the pandemic, but supply-side crises and acute inflation pressures have put a spanner in the works. The UK’s debt-to-GDP ratio is now above 100% for the first time since 1960 (when finances were still recovering from the Second World War), while the US is at a record high of 129% according to the US Congressional Budget Office.

Bringing these ratios down meaningfully in the next decade seems unlikely. Governments would need to run primary budget surpluses, requiring growth in tax revenues or lower spending – ideally both. Or an extraordinary growth spurt, which means debt/GDP naturally diminishes as GDP outgrows debt. Neither looks feasible. The World Bank now expects slower growth over the long term, and indeed, investor hopes of lower inflation are arguably predicated on such sluggish growth. Meanwhile, calls for public spending have gotten louder rather than quieter. Ageing populations (and electorates) in developed nations – which require larger healthcare and pension payments – and much-needed investment in the green transition make spending cuts look fanciful.

The UK is a prime example of these dynamics. We are all aware of the need for public spending, both as a long-term investment in Britain’s sluggish economy and as ongoing upkeep for critical services like health, social care and education. At the same time, growth prospects have been slashed, drastically lowering the expected tax base with which we can pay for such policies. Barring improbable tax reform, the only way to front the bill is extensive borrowing. But since this borrowing would already start from a high base, and much of it would be earmarked for things other than improving productivity, the government would effectively be resigning itself to indefinite debts.

Ultimately, populations will have to accept one or more of the following: persistently high inflation, stagnating living standards, or higher tax rates. The first is famously politically unstable, while we have seen over the last 15 years how the second can undermine liberal democracy. The third is the more realistic option, but it requires social cohesion and faith in the political system. That has been hard to come by in recent years across the US and Europe. This side of the Atlantic, where tax burdens are already relatively high, increased tax burdens will be a hard sell. In the US – where politics is so divided that a third of Americans think a civil war is coming – it may be impossible. Where monetary policy goes in this environment is hard to say. We can hardly blame central bankers for getting existential.

Emerging markets – if not China, India?

Emerging Market (EM) investors have had a stressful year. China has dominated the commentary once again, as it so often does, but this time with growth disappointment unwinding initial market optimism. But what about the other EM nations? China dominates both headlines and financial indices, but India in particular has had an impressive year. The narrowly-based Nifty 50 index has gained 10.3% over the last six months, despite the wider fall for EM equities. Exports of both goods and services have grown substantially (bucking the general global trend), while India’s government-led infrastructure push has helped demand and set the scene for better prospects ahead. The relative weakness of China, and Beijing’s increasingly aggressive attitude to its private sector, have also seen some reallocation of both trade and foreign investment. Near-term growth prospects are arguably better in India, and political restrictions have already led many Western investors to switch their preferred EM. Further improvements could mean India wins even more capital bound for its geopolitical rival.

That said, President Modi’s government has many of its own issues that could put off Western investors. This has not happened to a large degree yet, but India’s eagerness to keep trading with Russia is a definite sour note. There is also the question of China-India cooperation through BRICS summits. The collective of Brazil, Russia, India China and South Africa announced its expansion at its summit last week, inviting Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates — to join its ranks, and China and India agreed to remove troops from their disputed border. Strangely enough, after the US ramped up tensions with Beijing, it might be against India’s short-term interest to ease its own tensions with China.

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

Alex Clare

04/09/2023