Markets last week
In the wake of the previous week’s central bankers’ meeting in Jackson Hole, Wyoming, risk markets staged a full-scale retreat as over-optimistic investors digested the strong and unified message that there would be no premature pivot away from monetary tightening and a quick return to easy money. This is despite the clear evidence of developing economic weakness across the globe. Inflation is too high and must be crushed, even if this means pain for individuals and financial assets.
Both equities and bonds fell. The sharp recovery markets had seen after the June US Federal Reserve (Fed) meeting came as focus moved from inflation and worries over higher rates, to recession and the prospect of lower rates – and a sense that central banks would chicken out in the face of a bear market. Now, pronouncements from Fed Chair Jay Powell and others at Jackson Hole roughly dragged sentiment back to the former mood. Longer duration, growth areas where prices are more sensitive to rising bond yields fell the most, led by technology and other more highly rated areas of the market.
Slightly more nuanced economic data from the US towards the end of the week (where there is some evidence inflation may actually already have peaked) helped temper the worst of equity falls. The Non-Farm Payroll numbers in particular seemed to incorporate the two factors markets needed most: not too much strength, but some evidence of moderating inflationary pressures.
Moves in equities were similar across most regions. The US saw falls of 3.3%, the UK of 1.9% and Europe of 1.6%. In Asia, China fell by 3.6% and Japan by 2.5%. In the former, sentiment was hit by yet another lockdown in a major conurbation in the face of a local COVID-19 outbreak. This time it was Chengdu, a metropolis of some 22 million people.
Sectorally, technology was hit hardest, dropping around 5.1%, further hurt by the announcement from chip giant Nvidia that new US restrictions on the sale of the most sophisticated technologies to China would hurt its revenues by several hundred million US dollars. In a nasty market, more defensive areas still fell but held up better; utilities fell 2.3% and consumer staples by 2.4%. Financials were the best of a bad bunch, falling around 2%.
There was no respite in bonds, with short-dated and longer-dated issues both declining, which means higher yields. The US 10-year yield climbed to 3.19%, the UK equivalent to 2.92% and the German 10-year bund to 1.53%.
In the general rout, commodities proved no safe haven. Industrial metals dropped very sharply, with iron ore off 8.1% and copper by 6.5%. At least there was better news from agricultural commodities, where the resumption of grains exports from Ukraine has seen prices fall for several months, which down the road should help ease some elements of food inflation. Oil was also weak, with Brent crude falling 7.9% to US$93/barrel; whereas fears over Russian supply previously dominated sentiment, now worries centre on the demand destruction a recession would cause. Although also falling, gold was relatively robust, off only 1.5% at US$1,712/oz.
Currencies were also volatile, with sterling amongst the weakest as investors fretted over the Conservative party leadership election and the possibility of economically imprudent support to consumers. Pounds sterling fell 2% against the US dollar and by almost as much against the euro. The Japanese yen was also weak as interest rate differentials continue to prompt flows out of the yen and into the US dollar in particular. After a drop of another 1.8% this week, it stands at the lowest level against the greenback since 1998.
The week ahead
Monday: S&P services Purchasing Managers’ Index (PMI)
Our thoughts: After the manufacturing PMIs last week, it’s the turn of the services equivalents this week. In general, expectations are for a slightly weaker outcome. Whereas manufacturing has thus far been relatively easily able to pass on higher costs through price increases, there is a sense that services are more immediately exposed to the pressures of inflation. The PMIs, which are published across all major economies, should therefore be somewhat lower than previously, with a tendency to underperform expectations. In the current mood of “bad economic news is good for equities”, any pronounced weakness will likely be taken well, whereas strong readings will further confirm fears about hawkish moves on interest rates.
Monday: Outcome of the Conservative party leadership election, a new Prime Minister for the UK
Our thoughts: Politics rarely features in the section, but in the UK, the widely expected election of Liz Truss as the next leader of the ruling Conservative party and therefore the UK’s next Prime Minister is significant. Pounds sterling has already come under pressure over several months both against the US dollar, which is strong against pretty much everything at the moment, but also against the euro. This reflects fears that Ms Truss’ policy agenda in response to the energy crisis may be politically astute but economically dangerous. Several hedge funds are betting serious money against the pound. Therefore, assuming she is the winner, the composition of her cabinet is particularly important, alongside early major policy announcements. If there is confirmation of her campaign’s promised fiscally generous response to the energy crunch and associated cost of living squeeze, pounds sterling may continue to suffer. On the other hand, a more fiscally prudent approach could see stabilisation.
Thursday: European Central Bank (ECB) rate decision
Our thoughts: At Jackson Hole, the voices of the hawks on the ECB council could be clearly heard. Although the ECB has to accommodate many views, including some from members with less laser-like focus on inflation, ECB president Lagarde has set out a clear roadmap to higher interest rates, and the last move was finally to remove negative interest rates from the policy mix (the floor rate is now at zero). A further increase this week is baked into the cake, given guidance and high inflation in the eurozone. Now it seems more likely that we’ll see an increase of 0.75% rather than 0.5% this time, even though European economies are most heavily hurt by the soaring price of gas. Any lack of resolve would be taken poorly, with the euro the main likely target of downward pressure.
Markets for the week
In local currency
In sterling
| Index | Last week | YTD | Last week | YTD |
| UK | ||||
| FTSE 100 | -2.0% | -1.4% | -2.0% | -1.4% |
| FTSE 250 | -1.7% | -19.7% | -1.7% | -19.7% |
| FTSE All-Share | -1.9% | -5.0% | -1.9% | -5.0% |
| US | ||||
| US Equities | -3.3% | -17.7% | -1.4% | -3.3% |
| Europe | ||||
| European equities | -1.6% | -17.5% | 0.2% | -15.2% |
| Asia | ||||
| Japanese equities | -2.5% | -3.1% | -2.6% | -6.9% |
| Hong Kong equities | -3.6% | -16.9% | -1.7% | -3.0% |
| Emerging Markets | ||||
| Emerging market equities | -3.4% | -21.1% | -1.5% | -7.3% |
| Government bond yields (yield change in basis points) | Current level | Last Week | YTD | |
| 10-year Gilts | 2.92% | 32 | 195 | |
| 10-year US Treasury | 3.19% | 15 | 168 | |
| 10-year German Bund | 1.53% | 14 | 170 | |
| Currencies | Current level | Last Week | YTD | |
| Sterling/USD | 1.1509 | -2.0% | -14.9% | |
| Sterling/Euro | 1.1561 | -1.9% | -2.8% | |
| Euro/USD | 0.9954 | -0.1% | -12.5% | |
| Japanese yen/USD | 140.2 | -1.8% | -17.9% | |
| Commodities (in USD) | Current level | Last Week | YTD | |
| Brent oil (bbl) | 93.02 | -7.9% | 19.6% | |
| WTI oil (bbl) | 86.87 | -6.7% | 15.5% | |
| Copper (metric tonne) | 7633 | -6.5% | -21.5% | |
| Gold (oz) | 1712.19 | -1.5% | -6.4% |
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
A quiet week after the welter of announcements and policy speeches given at the Jackson Hole symposium previously. All eyes are now focused first on the ECB, which announces its rate decision this week, and then on the Fed later in September.
United States
A set of data that makes the Fed’s job harder; some continued progress on inflation, but signs of continuing strength in activity.
Surveys: The widely followed University of Michigan survey came in stronger than the previous month at 58.2, with both the current conditions measure (58.6) and the expectations element (58.0) ahead of consensus expectations. The Dallas Fed Manufacturing Activity index was also better, at -12.9 compared with -22.6 previously. Both these demonstrate the resilience of the US economy in the face of the rate rises seen to date.
The important Institute for Supply Management (ISM) PMI was unchanged from the previous month at 52.8, although many of the components were encouraging: prices paid fell to 52.5 from 60.0, new orders were up to 51.3 from a contractionary 48.0, and employment was sharply improved at 54.4 versus 49.9 last time. Along with the S&P Manufacturing PMI, which rose very slightly to 51.5, these will do little to assuage Fed concerns over the heat in the economy.
Housing: The Case-Schiller national house price index was slightly less exuberant than the previous month, although it remains super-hot at up 18.0% year-on-year, down from +19.9% last time.
Industry: Factory orders excluding volatile transportation orders fell 1.1% month-on-month, although the equivalent Durable Goods measure continued its slow and steady upwards rise, up 0.2% compared with July.
Consumer confidence: The Conference Board Consumer Confidence measure came in at 103.2 compared with 95.3 last month, with both main components sharply higher: the present conditions reading was 145.4 (compared with 139.7) and the future expectations element was 75.1 (65.5 last time). The improvements are likely linked to recent falls in gasoline prices in the US.
Employment: There was a swathe of employment data over the week. The most important of these were the Non-Farm Payroll data: the headline number saw a further 315,000 jobs created nationwide, which whilst down from last month’s revised gain of 526,000 was still better than expectations and shows the jobs market remains exceptionally tight, despite a small uptick in the unemployment rate to 3.7% from 3.5%. Average Hourly Earnings increased by a solid 5.2%, the same as last month. This tightness was further confirmed by a solid JOLTS job openings survey, which showed an increase in available roles to 11.24 million from the previous 11.04 million. Initial Jobless Claims were 232,000, down from the previous month and a slight break from the recent upwards trend. Continuing Claims were scarcely changed at 1.438 million. Challenger job cuts announcements, while still up sharply from last year’s extremely low levels, were up by less than previously.
Productivity: Non-Farm Productivity showed another weak number, falling 4.1% (-4.6% last time). Combined with an increase in unit labour costs of 10.2%, albeit down from 10.6% last time, with a strong labour market and robust earnings growth, there is little to stop the more hawkish members of the Fed from increasing rates by 0.75% for the third consecutive meeting later in the month.
Inflation: The University of Michigan’s inflation expectations were revised downwards, with the 1-year inflation rate from 5.0% to 4.8% and the 5-10-year inflation rate from 3.0% to 2.9%.
United Kingdom
A generally weak tone to data
Surveys: The S&P Manufacturing PMI was somewhat less bad than feared, at 47.3 compared with 46.0 at the last reading. However, it remains in contractionary territory. The Lloyds Business Barometer was much weaker than previously at 16.0 compared with 25.0. In retail, the British Retail Consortium (BRC) Shop Price index climbed 5.1% from 4.4% last month.
Housing: The Nationwide House Price index climbed 10.0% year-on-year, down from 11.0% last month and somewhat stronger than expected. Mortgage Applications remained steady at 63,800.
Consumer: Demand for consumer credit accelerated – a classic response to financial stress is to see an increase in credit card debt. Data showed an increase of 6.9% year-on-year, compared with a 6.6% rate the previous month.
Europe
Differences among consumers from country to country but business appears resilient despite eye-watering input price increases
Surveys: The S&P PMIs showed a generally flat progression compared with the previous month at somewhat subdued levels. In Germany, the reading was 49.1, compared with 49.8 last time; in France 49.6 compared with 49.8. The EU measure was 49.6 versus 49.7. This steady but anaemic level of activity was confirmed by the European Commission Economic Confidence indicator which came in at 97.6 compared with 98.9 previously.
Inflation: The German Consumer Price Index (CPI) climbed by 7.9% year-on-year, up from 7.5% previously. However, in France, which has less exposure to soaring imported gas prices, inflation fell slightly to 6.5% from 6.8%. Wider EU inflation came in at 9.1% at the headline level, with a core reading, excluding energy and food, of 4.3% – still way ahead of the ECB’s 2% target rate. German import price inflation continued at extremely high levels, at +28.9% compared with +29.9% last time; the pressures on German industry remain intense. The EC-compiled Producer Price Inflation gauge was even higher at +37.9%, up from +36.0% previously.
Consumer: German retail sales continued to fall, declining by 5.5%, albeit less than the very sharp decline seen in the previous month. French consumer expenditures also fell, by 4.3%, the same rate of decline as last month.
Unemployment: Germany saw a small uptick in unemployment, although it remains at historically very low levels for now. The rate increased to 5.5% from 5.4%. EU-wide unemployment moved slightly in the opposite direction, falling marginally to 6.6%.
China/India/Japan/Asia
Mixed data from Japan and China hit by another zero-COVID-19 lockdown
China: China announced a lockdown in Chengdu, a metropolitan area of some 22 million people and representing just under 2% of national GDP. The zero-COVID-19 policy pursued there continues to depress PMI readings, with the Caixin survey coming in at 49.5, compared with 50.4 previously.
Japan: The Jibun PMI survey was slightly ahead at 51.5 compared with 51.0 last month, and Japanese consumer confidence improved somewhat to 32.5 from 30.2 previously. With inflation at 2.4%, Japan appears to be weathering the current economic turbulence reasonably well.
Oil/Commodities/Emerging Markets
Oil was weaker on fears that recession would cut demand. Rumours surfaced that OPEC+ (OPEC nations plus Russia) would consider output cuts as a way to support the price – this after previously very slowly increasing output. Brent crude fell by 7.9%, although is still up nearly 20% year-to-date, and more in pounds sterling. With worries over economic growth to the fore, it was no surprise to see industrial metals play down too: iron ore fell 8.1% and copper by 6.5%.
