The last few weeks have seen the release of significant quantities of new data. But the primary underlying factors driving the financial markets remain the labour market and inflation. Essentially, market watchers are hoping to see the former rise and the latter fall. The picture is actually more nuanced, and those two trends are not mutually exclusive.
Sure – a few weeks ago, a batch of employment data seemed to suggest that the labour market was cooling. That’s when we saw rates fall and stocks rise on the belief that this would benefit inflation. The US Federal Reserve Bank even considered pausing its current cycle of rate hikes. But last week, the stock markets and many of its investors were once again beset by nerves: reports suggested a healthier jobs picture, sparking fears about what this could mean for inflation ahead of this week’s August data report.
Personally, I view oil price momentum – the recent “crude awakening” and surge in oil prices – as one of the biggest concerns. Following Russia’s and Saudi Arabia’s announcement that they would extend their voluntary production cuts right through to the end of the year, we have seen oil prices increase by around 10%. This could easily add to inflationary pressures across the broader economy.
The oil bulls may be staking their bets on the Chinese government picking up the pace of its economy stimulus drive, which would boost crude oil demand and cause more concern among central bankers in the West. Any significant rise in crude oil prices will increase the likelihood of a second wave of inflation and attendant rising costs – a pattern which characterised the Great Inflation of the 1970s.
That was blamed on rising oil prices, currency speculators and greedy union leaders, against a backdrop of war in the Middle East. The result was higher prices and wages, and the three-day working week in the UK as striking miners, electricians and railway workers (all clamouring for wage increases) created fears of power shortages.
This time, OPEC+ countries are cutting crude oil production while leading central banks around the world are tightening monetary policy to control inflation. And there is no real prospect of an end to the war in Ukraine on the horizon.
Nearly halfway through September, we are seeing both equities and bonds reacting nervously to hotter growth data, China’s increased pressure on tech company Apple and rising oil prices. September has the reputation of being the worst month in the year for stocks – that has been true for some 55% of Septembers since 1928. So it is highly likely that there will be further seasonal swings and reactions in response to additional headline data. Overall, however, we remain bullish on the outlook for quality investments.
In the UK, Bank of England Governor Andrew Bailey has suggested that rates were now much nearer to the top of the cycle following 14 consecutive hikes. A decision to raise rates further would be taken very carefully. Might the forthcoming policy meeting on 21 September see the final hike of this cycle? The Bank’s August business survey does indeed suggest that underlying pricing pressures are starting to wane. Now that the central banks of the US, the UK and Europe are pledging to be more data-dependent in their decision-making processes, any further squeezes from rising energy prices are definitely to be avoided.
Let’s turn back to the Chinese government and its efforts to kickstart its economy. Although China’s services activity has grown at its slowest pace since December, the private Caixin / S&P Global survey of services activity remains above the 50-point threshold, signalling expansion rather than anything more sinister. China has, however, suffered another fall in its export numbers, and is currently in the grips of concerns over its property sector. In the FX market, the renminbi has been under further downward pressure. The USD/CNY exchange rate is hovering around the psychological 7.35 level. Pessimism about China's economic outlook, compared to the more resilient US economy, has contributed to the interest rate differential between the two countries, as well as the weakness of the Chinese currency.
If the Chinese government were to fail in its efforts to get the country’s economy back onto an even keel, then oil prices could fall back, and China might actually end up driving global deflation. China is up against a very particular kind of problem: after years of remarkable growth underpinned by government and private-sector debt, the world’s second-largest economy is now facing the bursting – and even the demise – of its real estate sector. This is happening while its economy is slowing down dramatically: GDP growth forecast has been cut to 5% in 2023 and 4.5% in 2024.
Meanwhile, the world’s newest economic superpower has been taking shape in the form of India. Historically, major superpowers have only emerged when the populations of the countries in question have been large enough to produce a surplus of goods that the rest of the world wants.
India gained independence some 76 years ago, and has since evolved into the fifth-largest economy, leading the world in information technology and IT-enabled services.
It has recently become only the fourth country to land on the moon… and the very first to touch down at the lunar south pole. Its latest mission involves sending coronagraphy spacecraft Aditya-L1 to observe the Sun’s outermost layers – it will be the first rocket launched by an Asian nation to enter the sun’s orbit. These achievements are just the latest in a series of major milestones that India has reached.
While UK asset allocations towards the Indian stock market remain quite low – with most investors selectively choosing an Indian Fund or an Emerging Market ex China fund for their exposure – UK Chancellor Jeremy Hunt and Indian Finance Minister Nirmala Sitharaman recently announced that Indian firms could soon be listed on the London Stock Exchange. The Chancellor went on to say that he views India as Asia’s Silicon Valley… and the UK as Europe’s equivalent.
To conclude, it looks as though we have a few weeks of unstable market conditions ahead of us as the next batch of important global economic data is released. The central banks will be pondering their next moves on monetary policy, which could lead to further volatility. But remember – any weakness should be embraced as an opportunity to buy or add to quality stocks and bonds. We remain confident that the October 2022 bull market is intact.
