Warwick Wealth Matters – July 2023July 25, 2023
The implications of offshore assets for your willJuly 28, 2023
Most international markets in June continued the trend started in May as the threat of a US government default
was safely avoided. The Federal Reserve’s pause in rate rises, after 10 consecutive hikes, also added to positive market sentiment.
The United States markets continued to be driven by the large tech counters as the interest in the Artificial Intelligence aspect of the market continues to drive the hype. Both the Nasdaq and S&P showed significant gains. The S&P closed the month higher by 6.5%, while the Nasdaq ended the month up 6.6%. In contrast, the Dow Jones lagged the other two indices, only rising by 4.6% for the month.
On the economics front, data pointed to a resilient US economy, despite the higher rate environment, allaying fears of a US recession. Headline inflation for May came in lower than expected at 4.0% YoY vs the previous reading of 4.9% in April. Core CPI, which excludes the volatile energy and food components, declined to 5.3% YoY for May vs the April reading of 5.5%. A figure we quote regularly in our column, personal consumption expenditure (PCE), the Fed’s preferred inflation gauge, cooled to 0.1% MoM in May vs the reading 0.4% in April, which was below consensus forecasts of 0.4%. This is a sign that the Fed may not need to continue raising rates much higher in their attempt to curb inflation. Retail sales for the month rose unexpectedly again, however, up 0.3% MoM (1.6% YoY) after a 0.4% rise in April, with forecasts expecting a decline of 0.1% MoM.
As expected, the Fed kept rates unchanged at its June Federal Open Market Committee (FOMC) meeting, but with the Fed Chairman Powell, in- dicating that the next meeting would likely see a rate hike, in order to gradually reduce the inflation rate to the desired 2% level. The Fed continues to closely monitor the credit conditions and its effect on the US economy. In addition, the chart used to depict the Fed’s view for short term interest rates, known as the dot-plot, has hinted at the potential of two more rate hikes in the current cycle. This would align with the Fed revising upward the rate of PCE inflation for 2023 from an initial 3.6% forecast in March to 3.9% in June, while also seeing the pro- jected unemployment for the same period adjusted lower to 4.1% from 4.5%. As a result, the expectation of the first interest rate cut by the market has now shifted to the second quarter of 2024.
European markets followed their US counterparts firmer, as the European Commission President, Ursula von der Leyen, emphasised the need for the Union to de-risk from China, amidst the continued impact of the Russian invasion of Ukraine. There is also continued tension between the EU and China, as the former plans to decrease its exposure to the world’s second largest economy in critical areas
as laid out in the new European Economic Security Strategy.
The UK market ended the month stronger by 1.1%, while inflation continued to be an area of concern. UK inflation for May came in at 8.7% YoY, unchanged from the April reading, while core inflation, which excludes the volatile energy and food components, surprised the market on the upside by rising sharply to 7.1% vs the April reading of 6.8%. Despite the un- changed inflation rate, the OECD has predicted that inflation in the UK will remain the highest of the G7 countries over the full year. In response to continued sticky inflation, the Bank of England surprised the markets by a larger than expected 13th successive rate hike, this time of 50 basis points, taking the benchmark rate to 5.0% from 4.5%, its highest level since 2008. The decision was supported by a vote of 7-2 by the BOE’s Monetary Policy Committee.
Both the German and French markets strengthened by 3.1% and 4.2% respectively for the month of May, as Germany’s annual inflation rate was higher than expected, coming in at 6.8%, versus the forecast of 6.7%. Yet inflation for the EU region printed lower at 6.1% YoY vs the 7.0% reading in April, with annual inflation printing at 7.1% in May vs the 8.1% print in April. Like the UK, the European Central Bank raised rates by 25 basis points at its June meeting, lifting its deposit rate to 3.5%.
Asian markets ended the month on a mixed noted as in China, the Hang Seng closed the month up by 3.7%, with the Shanghai Composite index falling by 0.1%. China continues to experience a mixed reaction to its market opening post Covid, as a slower ramp up in spending continues. Factory activity for the month of June witnessed the third month of contraction as the official PMI number came in at 49.0, while the official non-manufacturing reading declined to 53.2 vs the previous reading of 54.5. The non-manufacturing PMI measures business sentiment in the construction and services sector, with a reading above 50.0 indicating expansion, and below that, a contraction. The slow recovery and continued poor PMI continue to raise questions about the strength of the world’s second biggest economy and its potential rebound. Monetary policy continues to be supportive, however, through a series of interest rate cuts, coupled with reductions in the reserve requirements. On the growth front, support should be seen from tax deduction as well as proceeds generated by special local bonds.
The Japanese market produced a second month of positive gains, jumping by 7.5% for June, as core inflation rose 3.2% YoY in May vs a reading of 3.4% in April, but ahead of the market consensus of a 3.1% YoY gain. The government of Prime Minister Kishida continues its efforts to address the costs associated with the ageing Japanese population, and there are hints of the minimum wage being raised from the current 961 yen to 1 000 yen. With the inflationary pressures, wages have hit a 30-year peak, raising hope that with the increased consumption, higher prices, matched with higher wages, can assist the Bank of Japan finally departing from its ultraaccommodative monetary policy stance.