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This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our flagship discretionary portfolios. Clients with bespoke or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
With the weak US employment report for July still in mind, investors were anxiously awaiting Federal Reserve (Fed) Chair Powell’s speech at the Jackson Hole Economic Symposium last week. It was his first address to the public since the Fed meeting in late July. Since then, a lot has happened. Just two days after the Fed decided to leave the policy rate unchanged, equity markets tumbled following an unexpected rise in the US unemployment rate and weaker-than-expected job growth. Fears of an imminent US recession emerged, leading markets to quickly price in additional Fed rate cuts.
More recently, markets have calmed down, in line with our expectation and decision to maintain our portfolio positioning during the summer, but the speed and scale of expected rate cuts have remained front and centre for investors. Powell’s speech at Jackson Hole that “the time has come for policy to adjust” delivered the signal that a September rate cut is very likely. That was enough for equity markets to rise, bond yields to fall, and the US dollar to weaken. In his speech, the Fed Chair also expressed more confidence that inflation is moderating and emphasised downside risks to the labour market, saying that any further weakening would be “unwelcome.” We expect the Fed to deliver a quarter-percent rate cut in September, followed by one or two more cuts later in the year.
The minutes from the European Central Bank (ECB) meeting in July showed that the September meeting was seen as a “good time to re-evaluate the level of monetary policy restriction”. We believe a quarter-percent rate cut is on the cards for September, the second of three rate cuts we expect from the ECB this year. In Sweden, the Riksbank, one of the first central banks to cut interest rates in the developed world, delivered its second quarter-percent rate cut, in line with market expectations. Having delivered a surprise cut in July, the People’s Bank of China (PBoC) last week decided to leave its one- and five-year loan prime rates unchanged. The PBoC has consistently kept policy loose to help foster an economic recovery in China but, so far, it has had limited effect.
Services sector picks up, portfolios positioned for growth
Last week, we also got new information on the economic growth outlook, with the release of the preliminary Purchasing Managers’ Indices (PMI) for the US, eurozone and the UK. The overall growth dynamics for these regions are fairly similar. Robust economic activity in the services sector continues to support economic growth, while the manufacturing sector remains weaker, particularly in the eurozone. In the US, the services PMI increased slightly in August, against consensus expectations of a decline, whereas the manufacturing PMI was weaker than expected but still pointing to growth. In the eurozone and the UK, the services PMI came in significantly better than expected. For the eurozone, this was primarily due to a strong services reading out of France, reflecting the economic boost from the Olympics in Paris. While manufacturing activity is contracting in the eurozone, it’s expanding in the UK. With the services PMI at a four-month high, the UK is showing good growth momentum.
With weaker employment data in the US, in line with our expectation of slower but positive US growth, the balance of risk has shifted from inflation to growth. We still think that the US economy is on a path towards a ‘soft landing’ (slowing inflation and slowing growth) rather than heading for a recession in the near term. Eurozone and UK growth continues to recover, albeit unevenly in Europe, with a contraction in the manufacturing sector, particularly in Germany. With a slight preference for equities over bonds relative to our strategic allocation, we’ve positioned our portfolios to benefit from this economic scenario. There are risks, of course, from growth weakening more than we expect to geopolitics or ‘sticky’ inflation. Our investments in high-quality bonds, gold, commodities or the equity ‘insurance’ instrument we hold in portfolios (where permitted by client knowledge and experience, investment guidelines and regulations) aim to mitigate the impact of possible adverse market scenarios.
This week: all eyes on Nvidia’s earnings report and inflation, focus on US election ramping up
This week, all eyes will be on Nvidia, the last of the ‘Magnificent Seven’ to report earnings for the second quarter. The company is expected to announce a significant revenue increase, driven by high demand for its chips used for Artificial Intelligence (AI) applications. Investors will be particularly looking to see if Nvidia can continue to exceed analysts’ expectations and raise guidance for the future. Given Nvidia’s significant weight in the S&P 500 equity index and its status as a bellwether for the AI industry, its results are likely to have a broader market impact.
With Kamala Harris officially accepting the presidential nomination at the Democratic National Convention last week, we will be watching if she holds on to her slight lead in the polls. While still a low probability, the odds of a ‘blue sweep’, an election outcome whereby the Democrats win the Presidency, the Senate and the House of Representatives, have gone up. Such an outcome could have a neutral to negative market impact, given that it would make it easier to implement Harris’s tax plan of raising the corporate tax rate from 21% to 28%, though it could also mitigate geopolitical risks and trade tensions relative to a Trump win scenario and a ‘red sweep’, which would be a positive. The next key event on the calendar is the presidential debate on 10 September.
On Friday, in terms of key economic data, eurozone inflation should slow further, close to just above 2%, likely confirming that the ECB looks set to cut rates again in September. Also on Friday, in the US, the personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, should rise slightly, but the overall trend remains one of moderation, which is why the Fed is likely to start its rate cutting cycle next month.
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Information correct as of 26 August 2024.
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