The performance of bond and stock markets was mixed in August with uncertainty over interest rates causing concern, but we remain confident about the longer-term outlook.
Market moves that mattered
Record UK wage growth. UK payroll data continued to paint a strong jobs market for July, although unemployment has risen above 4% in the three months to June.
UK basic wage growth hit a new high, with average earnings in the three months to June initially reported as growing 8.2%, including regular pay growth of almost 8%.
At least vacancies continued to fall back towards one million, suggesting some of those wage pressures will eventually subside.
In the shops, price rises slipped back below 7% in August as food inflation dropped below 12%. Data suggested retail sales are slowing as price rises fade.
House prices fell again, according to Nationwide, with RICS surveys confirming a weakening outlook. Net mortgage lending data remained notably subdued as higher mortgage rates bite.
The Bank of England raised rates by 25 basis points in August to 5.25% and said it expects UK inflation to fall in October due to the energy price changes.
The Bank flagged wage growth as being stickier than expected, raising fears of a wage price spiral. It also said interest rates will need to be restrictive for a sufficiently long period of time.
There was a bright spot with June’s GDP growth proving better than expected at 0.5% for the month, bringing second-quarter growth to 0.2%.
UK CPI inflation for July dropped to 6.8%, although core inflation remained stuck at 6.9%. Looking further up the supply chain, annual producer price inflation (PPI) turned negative in July, giving some future hope for lower consumer inflation.
Provisional UK PMI data for August looked weak for both manufacturing and service sectors. While consumer confidence is nowhere near as gloomy as it was last October, it does show the economy is finally balanced and any overtightening by the Bank of England could tip the UK into a recession.
Can the US avoid recession?
The debate continues as to whether the US can avoid a recession. Weekly jobless claims stayed low throughout August and although unemployment has ticked higher, it’s still below 4%. US manufacturing contracted for a tenth straight month in August, while the service sector picked up.
New job openings eased again and nonfarm payrolls increased higher than expected by 187,000.
With service sector pricing remaining high and wage growth still above 4%, questions remain about the outlook for US interest rates. In July, the headline CPI moved higher to 3.2% and core inflation is struggling to break decisively below 5%.
At the annual Jackson Hole symposium, US Federal Reserve Chair Jerome Powell warned that US rates would be kept high until inflation slows sustainably. While most central banks continue to debate rate rises, some countries are already paring rates back and signalled more cuts to come. For most though, the problem remains how to get core inflation significantly lower than the ‘sticky level’ of around 5%. More positively, public inflation expectations appear anchored at around 3%.
US consumer confidence and retail sales figures remain healthy, with the only obvious weakness coming from the continuing slowdown in existing home sales. All eyes are now on US economic growth. Second-quarter GDP has been revised down, but growth of around 0.5% per quarter is still solid enough for the time being. Fitch downgraded the US sovereign credit rating due to a deteriorating fiscal outlook, having hinted at such a move during the recent debt ceiling negotiations.
Europe’s job market remains tight
The job market in Europe remains tight, with unemployment levels at multi-year lows, but some of the economic data is more mixed.
German factory orders proved strong in June, but industrial production looked weaker and recent surveys suggest the German business climate is getting worse.
More widely, second-quarter economic growth in the euro area was initially reported as 0.3%, but growth for the first quarter proved anaemic and revisions can change these initial numbers.
Similar to other regions, the August PMIs for Europe showed a big drop in the service sector and continued weakness in manufacturing. Sticky inflation is also present, with provisional data for August reporting headline and core measure of CPI still north of 5%, which keeps the pressure on the European Central Bank (ECB) for its September meeting.
China slowdown fears mount
The potential for a substantial slowdown in China has concerned investors this year. Recently we’ve seen weak import and export data, poor retail sales numbers, while CPI inflation has turned marginally negative for the first time since Covid.
Addressing these economic concerns, China made some small cuts to interest rates in August, though these were smaller scale than financial markets had hoped for. More reassuring were comments from Chinese officials pledging further policy support and government spending. The market is certainly looking for more, given concerns about China’s large property sector.
Japanese economy remains healthy
Core inflation for Japan looks unusually high at more than 4%, but it’s not spilling over into wage growth – the enemy faced by many other countries.
Economic surveys for July continued to paint a healthy picture with second-quarter GDP reported to be much higher than expected at 1.5% (or 6% higher than the prior year). The service sector remained strong in August and isn’t showing the weakness being reported in other regions. Japanese consumer confidence eased back slightly in August, but remains high by recent standards and retail sales continue to be strong.
Investment highlights - a month of two halves
After big initial falls for bonds and equities, there was a modest recovery, which left overall investment returns in negative territory for the month (down around 2%, depending on the market). Once again, the ever-changing interest rate landscape was at the heart of it all, as market participants try to second guess just how far central banks will push interest rates up – and for how long they will leave them there.
At the end of a heavy second-quarter earnings season, company results were a little better than expected, with falls in profit margins (due to higher costs) no worse than had already been expected. These figures were encouraging and bode well for the longer-term returns we aim for.
Please remember the value of investments and any income can go down as well as up and you may get back less than you invest.