With the US celebrating Independence Day, the week started slowly
But after stronger than expected data in the past couple of trading sessions, the market mood has swung towards the narrative of interest rates moving higher, and staying there for longer, and as a result, we have seen both equities and bonds selling off. As the week draws to a close, the focus today is on the US monthly employment data published this afternoon UK time, with investors looking for any cracks in the data that could give hope to those hoping the US Federal Reserve will not go too much further hiking interest rates.
We got some insight into the Fed’s thinking this week via the minutes from their June meeting where they paused rate rises after 10 consecutive hikes but forecast two additional rate hikes later in the year. The minutes highlighted some divisions over the need to pause, not least with ongoing concern over sticky inflation with labour markets showing continued resilience. The minutes noted “almost all participants judged it appropriate or acceptable to maintain the target range [at 5-5.25%]; some participants indicated they favoured raising the target range at this meeting or they could have supported such a proposal”. The minutes have served to remind markets that the Fed continues to tilt in a hawkish direction, and the pause in hikes in June was just that, with hikes likely to resume this month.
The economic data has been dominated by the usual PMI updates we see at the start of every month. Manufacturing weakness persisted, and indeed trended weaker across most developed economies, with all the main eurozone economies and the UK along with the US posting PMI manufacturing data well into ‘contraction’ territory. Chinese PMI manufacturing data remained just in positive territory while India continued to be an outlier (in a good way) with manufacturing data remaining consistently strong. While manufacturing across most economies has been weak for some time now, we have not seen the usual follow through into the services sector though the data for June did show a notable deterioration across the UK and eurozone. It did remain in positive territory, however. The data for China also weakened, once again raising the spectre of stimulus to keep the economy on track as the initial rebound from Covid reopening loses some momentum.
The US services sector however continued to show strong resilience, with the June survey improving on May and remaining well into ‘expansion’ territory. In the eurozone, the latest producer price index (PPI) data showed a year-on-year decline of 1.5%. As a lead indicator for inflation, this points to deflationary momentum building. Bear in mind the PPI data peaked out last August at 43.4% but as energy prices have fallen, PPI has rolled over. In the short term however, with core inflation still sticky, markets are still expecting further hikes to come from the European Central Bank (ECB). Head of the German Bundesbank, and ECB board member, Joachim Nagel said earlier this week that rate hikes still had “some way to go”.
Political news flow has also been quiet this week though the move by China to limit the export of some key raw materials used in semiconductors and electric vehicles highlights a theme that will be with us for some time – countries acting in their own self-interest to secure scare resources that will be very important in both technology and the green transition in the coming decades. From next month, Chinese exporters will need a government permit to export germanium or gallium. We have seen policy action from both the US and China in recent months and expect further moves from the two superpowers to secure supply chains for key materials and limit exports to ‘unfriendly’ nations.
Another example this week came from the Wall Street Journal, which reported the US government is considering restricting Chinese companies access to cloud computing services from US companies such as Amazon and Microsoft. Despite the decision to limit some raw material exports, Chinese leader Xi Jinping called on nations to spurn decoupling, saying he wanted to work with nations to “reject the moves of setting up barriers, decoupling and severing supply chains”. This week has also seen the fallout from the elections in Brazil last Autumn continue, with the former President, Jair Bolsonaro, banned from holding public office until 2030. Brazil’s top electoral court found Bolsonaro to have abused his powers by casting doubt over the trustworthiness of electronic voting machines and implying the 2022 election was rigged.
Scott and I will host a webinar next Thursday where we will discuss Q2 performance and portfolio changes, as well as discussing our recent move to add to Japan in the portfolios. We’ll also consider if the strong returns seen in the first half of 2023 can be maintained and whether the excitement around Artificial Intelligence justifies some of the huge moves higher that we have seen in some stock prices so far this year. Listen in next Thursday afternoon – you can register here.
Have a good weekend. If you’re into tennis, cricket or cycling it could be a hectic one…
Regards,
Anthony.
