The World In A Week - Economy or Inflation – That is the Question
Written by Chris Ayton
The impact of higher UK interest rates is increasingly evident in many sectors of the economy. For example, last week The Insolvency Service released data showing the highest corporate insolvency numbers in the UK since 2009. These are companies that can no longer pay their debts, with construction, hotels and food retail particularly affected in the latest numbers.
Data from the Royal Institute of Chartered Surveyors last week also showed the largest drop in construction activity since the pandemic, when the industry largely came to a halt. This current sharp slowdown is undoubtedly being driven by higher costs of borrowing.
However, according to Nationwide, UK house prices unexpectedly rose +0.9% last month, supported by wage growth and a lack of supply of properties for sale. This was the largest rise since March 2022. However, Nationwide also noted the number of transactions remains depressed and prices are still 3.3% lower than where they were a year ago. In real terms, i.e., after inflation, the declines are obviously even greater. Perhaps with one eye on a slowing economic backdrop, the Bank of England kept interest rates on hold last week.
Economic data coming out of Europe last week did not make happy reading either. Firstly, Germany announced it had unexpectedly fallen back into negative GDP growth in the third quarter. Eurostat, the EU statistics office, then announced the Eurozone economy had also shrunk in the third quarter with contractions in Germany, Ireland and Austria offsetting growth in Spain, Portugal and France. Eurozone manufacturing activity also contracted for the eighteenth month in a row, and at a faster pace than seen previously. The one bright note was that this weaker activity, combined with lower energy prices, helped Eurozone inflation fall more than expected to 2.9% year-on-year. This perhaps supported the European Central Bank’s recent decision to keep its benchmark interest rate on hold at 4%.
With an interest rate driven economic slowdown seemingly taking effect, it remains to be seen if and when the attention of policymakers will turn to supporting growth, rather than attacking inflation. Although Central Banks are supposed to be “independent”, political pressure for a change of course will likely be particularly prevalent in countries where a general election is on the horizon. Clearly, any sense that rate hikes may be behind us will be supportive of the strong total return opportunity we see in high quality bonds.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 6th November 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - Held Steady
Written by Ilaria Massei
The Office for National Statistics published a new set of data elaborating on a new methodology, which signalled that the UK's unemployment rate increased to 4.2% during the three months ending in August, compared to 4.0% in the period from March to May. On a separate note, a survey conducted among purchasing managers indicated that business activity within the private sector continued to be in a contractionary phase for the third consecutive month in October. Net approvals for house purchases, which act as a gauge for future borrowing trends, declined to 45,400 in August 2023. This represented a drop from the revised July figure of 49,500, but slightly surpassed the market's projected 45,000. This decrease marked the lowest point since February, reflecting softened housing activity in response to the Bank of England's assertive tightening measures.
Following ten consecutive interest rate hikes, the European Central Bank (ECB) opted to keep its key deposit rate steady at 4.0%. The ECB reaffirmed that maintaining this rate for an extended period would assist in bringing back inflation to its medium-term goal of 2.0%. The ECB President Christine Lagarde expressed that the eurozone's economic condition was fragile and expected to persist in this state for the remainder of the year.
In the US, the focus was on earnings announcements. Although the majority of the mega-cap tech firms displayed robust growth and surpassed consensus forecasts, investors appeared to react strongly to signs of increasing costs, putting downward pressure on stock prices. Most of the equity indexes finished lower last week, moving to correction territory, defined as a decrease by more than 10% of an equity index from a recent high.
Elsewhere, equities in China rose as an improvement in industrial profits suggested that the economy may be stabilising. Additionally, last Tuesday, China’s government authorised the issuance of RMB 1 trillion in additional sovereign debt and approved a plan to raise the fiscal deficit for 2023 to about 3.8% of gross domestic product, up from the 3% limit it set in March.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 30th October 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - The Refinancing Challenge is Real
Written by Cormac Nevin
Last week was a challenging one for markets, with the MSCI All Country World Index of global equities down -2.6% in both GBP and local currency terms. It was a broad-based selloff across various global equity markets, while global treasury bonds, credit and high yield bonds were also down modestly.
While geopolitics currently dominate the headlines, with certain markets wary of an escalation of tensions in the Middle East, it is likely that the challenge faced by markets is found closer to home. Over the last six months the “real” rate of interest, which is the rate of interest in excess of the expected inflation rate, has reverted to highs not seen since 2008. For example, the five-year real interest rate in the U.S. reached 2.4% over the month of October.
As inflation is increasingly looking like a risk that is now in the rear-view mirror, markets and economies more broadly are having to contend with a sharp increase in the cost of financing instituted by central banks. The impact is being seen globally as consumers and companies alike re-adjust to the new economic reality. House price sales in the U.S. are now at a 27-year low, as homeowners are reticent to move from mortgages fixed at multi-decade lows in years prior to the current mortgage rate of approximately 8%. In the UK, the number of property transactions has also slowed to the lowest rate in years. Other components of the economy are also facing pockets of challenge, as corporate bankruptcy filings increase and the Private Equity complex resorts to alternative financing sources to meet commitments as they fall due.
While pockets of the economy appear challenged as outlined above, we should be mindful that it is likely that an excellent total return opportunity has presented itself as yields on liquid, high-quality government bonds are at multi-decade highs and could realise appetising gains should central banks be forced to cut rates in the face of economic weakness.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 23rd October 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - One last hike?
Written by Millan Chauhan
US markets are currently weighing up whether the Federal Reserve will implement a further interest rate hike at their next scheduled meeting at the end of October. At the Federal Reserve’s last meeting, rates were held steady at a target range of between 5.25% - 5.50%. Over the last few weeks, we have seen yields on longer-dated US Treasury Bonds move higher following the Federal Reserve’s narrative that interest rates could be higher for longer. Over the course of last week, we saw yields on 30-year US Treasury Bonds reach 4.9% which we haven’t seen happen since 2007.
However, at the end of last week, we saw the Bureau of Labor Statistics release the latest US jobs report which surprised markets as we saw an additional 336,000 roles added to the workforce which was well above the consensus of 170,000 and above August’s revised figure of 227,000. With the labour market remaining stronger than expected, there could be one further interest rate hike implemented by the Federal Reserve. Ahead of the Federal Reserve’s next meeting, we are expecting to see the latest US inflation data be revealed this Thursday with consensus leaning towards 3.6%.
Elsewhere, in the UK, house prices fell for a sixth consecutive month as prices fell -0.4% month-over-month in September. House prices began to come under pressure from April onwards as rising borrowing costs have reduced the affordability of new mortgages.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 9th October 2023
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - Open All Hours
Written by Shane Balkham
The US government avoided a shutdown late last night, as a dramatic vote at the weekend saw House Speaker Kevin McCarthy navigating around Republican rebels that have been hounding him for weeks. With less than an hour to go, the White House released a statement at 11:15pm advising that President Biden had signed the measure on a short-term funding deal.
No good deed goes unpunished in US politics. While Kevin McCarthy may be congratulated by some for buying Congress a few more weeks to negotiate spending priorities and averting a government shutdown, it seems his actions may cost him his job.
Rather than try to placate the far-right rebels, whose demands were too outlandish to pass the spending bill, McCarthy instead pushed ahead with Democratic support and only half of that of the Republicans. This triggered a response from the rebels who threatened to topple McCarthy if he opted to push legislation forward that needed Democratic support to pass. The challenge opens up an unpredictable political skirmish this week, as the band of Republican rebels have now made good on the threat of toppling McCarthy.
It is no wonder that the rating agencies look upon the US with tired eyes. It was only in August that Fitch downgraded the credit worthiness of the US, on the back of weaker governance and heightened political tensions. Last week also saw Moody’s, another rating agency, warn that a government shutdown would be ‘credit negative’ for the US rating and underscores the continued weakness of US governance.
It was better news for the UK. The Office for National Statistics (ONS) revised the growth for the UK economy in the first quarter of 2023 up to 0.3% from the earlier estimate of 0.1%. The ONS estimate for second quarter growth remained unchanged at 0.2%. Growth was also faster than expected last year, up to 4.3% for 2022 revised from an estimate of 4.1%.
However, it is always worth remembering that the US economy is still arguably the most influential economy in the world and how the US government conducts itself still matters to global investors. Downgrades in ratings could increase the cost of debt for the US government, at the same time they are trying to ratify future spending plans. With the Federal Reserve currently navigating the potential end of its hiking cycle, these are unwanted distractions at a time of important decision making. It is also worth remembering that any significant disruptions or increased costs in the US, resulting from downgrades and fiscal challenges, could have knock-on effects on the global economy, including the UK.
Political pressure is building and taking centre stage once again, even before we have entered the political circus that will be 2024’s Presidential Election campaign. Media noise and volatility will likely increase, making it critical that investors have robust long-term multi-asset portfolios, with appropriate levels of diversification.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of [02/10/23].
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - You have paused your hiking cycle; do you wish to continue?
Written by Millan Chauhan
The UK Consumer Price Index (CPI) slowed to 6.7% in the twelve-months to August 2023, with this inflation print below market expectations of 7.0%. The encouraging signs of slowing inflation did come as a surprise to markets and led to an initial sell off in Sterling and a dampening of forecasts for an interest rate hike by the Bank of England (BoE). Subsequently, the BoE Monetary Policy Committee narrowly voted 5-4 to keep interest rates at 5.25%, with four of those members voting to increase rates by 0.25%. The BoE also stated that it expects CPI inflation to fall significantly in the near term following lower annual energy price inflation and further declines in food price inflation.
The Federal Reserve kept interest rates at the target range of between 5.25%-5.5% following its meeting last week, having raised interest rates by 0.25% in July 2023. The Federal Reserve also signalled its outlook for its target funds rate, which is expected to peak at between 5.5%-5.75%. This equates to one further 0.25% interest rate hike this year with rate cuts expected from 2024 onwards. US Inflation accelerated to 3.7% in the twelve-months to August 2023, up from 3.2% in the twelve-months to July 2023. The largest contributions to this print were rising energy prices and housing related costs. The perception that rates could stay higher for longer led equity markets to decline over the week.
Elsewhere, the Governor of the Bank of Japan, Kazuo Ueda stated that Japan is yet to see inflation settling at its 2% target range and decided to keep its short-term interest rate at -0.1%. Japan’s Core CPI rose by 3.1% in the twelve-months to August 2023. Following this announcement, the Japanese Yen sharply fell towards ¥148 per dollar and there are expectations that the Japanese authorities may step in if the Japanese Yen continues to weaken.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 25th September 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - The US Labour Market Enters The Fall
Written by Cormac Nevin
While August has been a moderately negative month for markets, we saw a widespread rally last week. This was led by Japanese Equities, as well as growth-biased and small cap equities globally.
The stand-out event of last week was the release of employment data in the US on Friday. This data illustrated how the labour market has been weakening, despite previously appearing to be impervious to the interest rate hiking cycle that the Federal Reserve has been enacting for the last year and a half to cool inflation.
Non-farm payroll data, which is an indication of hiring activity for the month of August, came in slightly higher than expected, however, the data releases for prior months were revised down significantly. It seems to be the case that the initial data releases this year have been too optimistic and are then revised downwards as time passes. In an unexpected move, the unemployment rate for the US also rose from 3.5% to 3.8%, as more people began seeking work who had not been doing so previously. This potentially indicates that the store of cash which households built up over the pandemic, and which has provided a significant economic boost in the reopening, has now begun to run dry.
While the burst of inflationary pressure we witnessed coming out of the Covid-19 pandemic was largely the result of supply chain disruption and shifts in consumer preferences, the Federal Reserve and most other global central banks have responded with a significant tightening in monetary policy to ensure any inflationary impulses are wrought out of the system. In their view, this entails an increase in unemployment to control inflation. The degree of indebtedness globally, along with long-established demographic changes, raises questions about the ability of major economies to sustain higher interest rates without encountering problems. This should likely make central bankers pause for thought.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 04/09/2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - Fly Me To The Moon
Written by Shane Balkham
Last week was naturally focused on the opening speeches at the Jackson Hole symposium, an annual gathering of policymakers from around the world, to discuss topical financial events and trends. The Federal Reserve Bank of Kansas City was hosting as normal, with the theme for this year’s event being “Structural Shifts in the Global Economy.”
As many suspected, there were no surprises coming from this year’s conference. Dusting down much of 2022’s speech, Jerome Powell, the Chair of the US Federal Reserve, reiterated the fight against inflation, with an emphasis on risk-management in restoring price stability across the globe. This could mean we are close to peak rates in many developed economies, but it could also mean leaving rates on pause for longer to ensure the battle has been won.
Winning the battle for dominance of supplying the burgeoning demand for AI systems was Nvidia, which became the first semiconductor company to pass $1 trillion market cap. The chip manufacturer gave another strong quarterly revenue forecast as orders for its AI processors, adept at handling the heavy workloads required by AI, surged allowing it to create a market leading position.
Forecasts do get revised, and the US gave a downward revision to the March jobs’ forecast that was originally reported. It was initially estimated that around 300,000 fewer jobs were created, which could be good news for central banks, as they would like to see a slightly weaker labour market. The balance between fighting inflation and supporting economic growth is becoming increasingly difficult. This is starting to show in the US retail sector, where excess consumer savings built up during the pandemic are perceived to be running out as the interest rate hikes are starting to pinch. Department stores are seeing a fall in sales and a worsening in their credit card delinquencies.
Something that cannot be ignored for too long is Russia. Last week saw the Wagner mercenary group founder Yevgeny Prigozhin killed, as the plane he was on exploded killing all that were aboard. Putin’s comment on the crash saw him describe Prigozhin as “a man with a complicated fate.”
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 29th August 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week - Nothing to See Here
Written by Chris Ayton
It was a tough week for global equity markets with the MSCI All Country World Index -2.7% in Sterling terms. Bonds also declined with the Bloomberg Global Aggregate Index -0.3% in GBP hedged terms. Credit and high yield indices were down even more.
Expectations of a huge post COVID bounce in China’s economy have proved fruitless with it instead showing increasing signs of strain and, within China’s property market in particular, clear signs of distress. On the back of large property developer, Country Garden, recently missing coupon payments on two US Dollar denominated bonds, last week saw further news of some retail wealth management products that are exposed to the Chinese property market failing to make scheduled payouts. Youth unemployment (16-24 year olds) also reached such a worryingly high level (over 20%) that authorities concluded the data “needed improving” and the National Bureau of Statistics decided to stop reporting it. Clearly nothing to see here! This challenging backdrop led to the People’s Bank of China unexpectedly cutting a benchmark interest rate by the biggest margin since the start of the COVID pandemic and further stimulus is expected to be needed to get China back on track to hit its GDP growth targets.
In the UK, inflation came down from an annual rate of 7.9% in June to 6.8% in July aided by lower gas and electricity prices. However, inflation stripping out food and energy was unchanged and combined with the news that UK wage growth hit approximately 8% is maintaining pressure on the Bank of England to continue on its path of increasing interest rates to cool the economy. This is despite retail sales in the UK declining by a higher than expected 1.2% in July, suggesting the past rate rises are already starting to take effect.
The UK housing market was also a hot topic of discussion last week. Pressured by a lack of rental supply and landlords facing higher mortgage repayments, UK residential rents rose by an annual rate of 5.3% in the year to July, the highest rise on record. House prices, however, have been faring less well as the Nationwide Building Society reported that UK house prices fell at an annual rate of 3.8 per cent in July, the largest decline since 2009. However, in a small piece of brighter news it was reported that for the fourth week in a row, UK banks and building societies were set to reduce interest rates for fixed rate mortgages, potentially signalling that the slowdown in mortgage applications is starting to lead to some competition for the business that remains.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 21st August 2023.
© 2023 YOU Asset Management. All rights reserved.
The World In A Week – The Great Escape (from Recession)
Written by Millan Chauhan
The Office for National Statistics released the latest monthly GDP data for the UK, which saw the economy grow at +0.2% in September 2023, which equated to a third quarter GDP figure of 0.0%. September’s GDP reading was largely driven by services and construction growth, however, consumer-facing services fell.
Elsewhere in Europe, economic conditions continued to deteriorate as retail sales in the eurozone fell -0.3% in September, which marked the third consecutive month of negative sales growth. The figure was worse than expected, as consumer demand continues to be challenged by the effects of higher borrowing costs and input costs.
The global ratings agency, Moody’s, changed the outlook on US government debt from stable to negative since fiscal deficits remain large and borrowing costs on its debt have risen significantly. Meanwhile, the US stock market continued to perform well, as the NASDAQ 100 Index returned +4.4% last week in GBP terms, an index which is largely dominated by technology companies such as Google, Microsoft, and Amazon. Microsoft is also now trading at all-time highs.
Looking ahead this week, there are numerous important economic data releases including the announcement of the US Inflation rate on Tuesday, with expectations leaning towards 3.3%, and the UK inflation rate on Wednesday, with expectations at 4.8%. On Friday, the eurozone area inflation rate will also be released, with expectations at 2.9%.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.
The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 13th November 2023.
© 2023 YOU Asset Management. All rights reserved.