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Market Update July 2023

Hopes for an economic soft landing rise

  • UK core inflation falls to 6.9%. Grocery inflation falls for a fourth consecutive month. Rental inflation rises to 5.1%, the highest level on record.

  • UK labour market remains strong. 102,000 jobs were added in the three months ending in May and wage growth has accelerated to 6.9%.

  • US Federal Reserve resumes rate hikes after June pause. Fed Funds Rate increased by 0.25%.

  • Bank of England and European Central Bank also increase benchmark interest rates by 0.25%.

  • During July, the UK Government sold two-year government bonds at 5.7%, which represents the highest yield at issue since the Debt Management Office was established in 1998.

  • The US economy grew by a better-than-expected 0.6% between the first and the second quarters. Consumer spending remains strong and consumer confidence is at an 18-month high.

  • Price of crude oil spikes higher following production cuts.

Let’s dispel a common myth in investing – Summer is never quiet! Global Equities enjoyed a reasonably strong month in July, as inflation pressures showed further signs of easing around the world. In the US, The Federal Reserve’s (Fed) preferred inflation measure, the core personal consumption expenditure index, fell to 4.1% in the 12 months to June. The Fed is becoming increasingly confident that inflation is coming under control. UK core inflation fell to 6.9%, considerably below economists’ expectations. Economic growth and consumer spending continue to hold up better than expected, particularly in the US.

Inflation falling is clearly a positive sign, but it remains stubbornly above the Central Banks’ target of 2%. As a result, The Fed increased the Fed Funds rate by 0.25% and the Bank of England and European Central Bank both followed suit and increased their benchmark interest rates by 0.25% in July.

Ben Bernanke, the former head of the Fed, believes that the US rate hike may be the last. Closing the book on the Fed’s landmark tightening campaign is emblematic of a growing belief in a soft landing for the US economy: Unemployment remains at half-century lows as inflation cools. Add to that the end of the pandemic and a suite of massive legislative programs unlike anything since the New Deal, and one could think the 2024 election was President Joe Biden’s to lose. However, even with his potential Republican rival facing multiple prosecutions, you would be wrong. White House officials have started to worry that Americans weren’t giving the Democrat sufficient credit for his economic achievements. Despite its vigour, a majority of Americans nevertheless feel sour about the economy. They may still be smarting from two years of historically high prices for everything, and those bruises could be overshadowing Biden’s accomplishments: He defused the GOP-induced debt-ceiling crisis. He passed through Congress sweeping bills to boost the green energy economy, subsidize the construction of new semiconductor factories, expand broadband access and repair hundreds of roads and bridges. But as of right now, “Bidenomics” may not be enough.

However the 2024 US election plays out, we are laser-focused on the interest rate path over the next few months, as empirical evidence shows this is a major driver of investment returns.

The second quarter US earnings season kicked off in July. According to FactSet, the index of the largest 500 US stocks is set to log a roughly 7% year-over-year decline in earnings for the quarter. That would mark the largest quarterly earnings decline for the index since the second quarter of 2020. However, many stocks, including banks, posted stronger-than-expected profits during the quarter. The index of the largest 500 listed US stocks, rose 2.2% during the month.

The performance of Chinese equities bounced back strongly during the month. Their economy grew at a better-than-expected 0.8% during the second quarter. Chinese stocks were also helped by new measures by Chinese regulators to support the ailing property market.

Something we are watching is Saudi Arabia and Russia deepening Oil production cuts to boost flagging prices. As the world’s largest oil exporters, these cuts pushed the price of a barrel of WTI crude oil back above $80, its highest value since October 2022.

To summarise, the combination of falling inflation and still positive economic growth are strengthening the case for a “soft landing”, whereby inflation will be brought under control without causing a deep recession. For the moment, Equity markets are liking what they are seeing.

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This document has been prepared for Ermin Fosse Financial Management LLP and is for information purposes only.

It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product.

Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.

Please contact us before you invest / disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.

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