Equity markets stumble
UK inflation slowed to 6.8% in July from 7.9% in June, primarily due to lower energy costs. US headline inflation picks up slightly in July, rising 3.2% year-over-year.
The UK economy grew by a greater-than-expected 0.2% from the first quarter to the second quarter.
The Office for National Statistics sharply upgraded the UK’s GDP growth estimates for 2021 from 7.6% to 8.7%, which suggests the UK recovered much faster from the Covid pandemic than originally thought.
UK wages (excluding bonuses) rose at a record annual rate of 7.8% in the three months to June.
The Bank of England increased interest rates by 25 basis points to 5.25%.
US retail sales continue to grow strongly.
The yield on UK and US government bonds hit a 16-year high.
Oil prices rise strongly, partly triggered by Russia agreeing with OPEC+ members to further cut crude exports.
Fitch Ratings unexpectedly downgraded the US's debt to AA from AAA.
Administrators confirmed nearly 300 job losses at UK retailer Wilk.
China stops reporting youth unemployment data shortly after the measure hit a record high.
Equity markets suffered a summer pause during August. In what appears to be a return of good economic news being bad for investment markets, resilient growth in the US is fuelling a fear that interest rates will need to be raised higher in the battle to defeat inflation.
The Jackson Hole Economic Symposium took place during the month. This is an annual event, hosted by the US Federal Reserve Bank, to discuss the most pressing matters facing global economics. It has historically been an important event for investors as it can offer clues on potential policy shifts. Last week the focus was on the necessary policy adjustment from reducing inflation to keeping it under control. The rate of price increases has slowed sharply in the US and is moderating in Europe, but Powell and Christine Lagarde, the President of the European Central Bank, were clear that there is still plenty of work to do. Working out exactly when the inflation threat is diminishing is proving hard in the face of unstable supply conditions that continue to affect prices. Fed Chair Jerome Powell pledged that officials would approach future policy decisions “carefully”, suggesting a high bar for the Fed to again raise the federal funds rate at its next meeting in September.
It was the surging price of oil that powered inflation to 40-year highs in 2022. This trend has been reversing this year, but there has been a recent pick-up in the price of oil with WTI crude spiking a further 4.8% higher in August as supply cuts from some of the world’s biggest producers continue to bite. This is something we are watching closely given its potential impact on inflation and by extension on interest rate moves and equity market performance.
Chinese equities suffered an ugly month as data showed the world’s second-largest economy falling into deflation. China is already struggling with a weak economy and an ailing property sector.
Bond yields generally moved higher during the month. The yield on long-dated US and UK government bonds both reached their highest levels since the global financial crisis. This provided a headwind for most bond funds, although the impact from rising yields on the capital value of bonds is now being offset to some extent by the relatively high income yield that bonds are now generating. Bonds that mature relatively soon continue to offer a higher yield than bonds that mature further in the distance, which creates a fairly unusual phenomenon called an “inverted yield curve”. This higher yield available on short dated bonds, plus the fact that they generally suffer less from rising yields, meant that they outperformed during the month.
At the start of the month, rating agency Fitch unexpectedly downgraded the credit rating of the US. This did not help general sentiment in the markets, but it did no harm to the US Dollar, which gained 1.5% versus Sterling after suffering a difficult 2023 so far.
September is seasonally a weak month for equity markets, but we are still of the view that markets grind higher for now. We are in the 'Late Cycle', but previous episodes have shown this to be a good time to be an investor.
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