That summer feeling

That summer feeling is starting to hit markets. In comparison to previous months, it feels almost as though there is some calm returning and no major shifts to report on. Some trends though, either breaking or continuing, are worth keeping on top of.

The latest data from China confirmed a few things. Firstly, whilst GDP continues to gain momentum, printing at 5.5% for the year, a full percentage point above the previous reading, it did miss by some margin the expected figure. Retail sales year to date though, came in above consensus at a rather large 8.2% and industrial production steamed ahead, coming in almost twice expectations at 4.4%. So while the underlying drivers do appear to be there, the headwind seems to be one that is mirrored elsewhere: property investment is down 7.9% year to date. Closer to home, Rightmove in the UK reported sellers cutting asking prices for the first time this year. Prices remain 0.5% above this time last year, but that too may pass. Globally, on an inflation-adjusted, or “real” basis, for the first time in twelve years, housing prices have dropped 2%. The below from Visual Capitalist maps it neatly.

We are now entering earnings season, and as is traditional, the banks are stepping up to the plate first. For now, the theme has been one of beating. Our old friend NIM (or net interest margin, the difference between borrowing and lending rates) is performing better now that we are rightly in an environment where there are proper interest rates. We’ll keep you updated next month on the fuller and broader picture.

*excluding First Republic acquisition

Thus far this year, despite what has looked like treading treacle at times, global stocks have rallied almost $10 trillion. Expensive to be on the sidelines, or short, if that is your mandate. Earnings are expected to be down between 9-12% in major Western economies, so at least something is priced in and shocks should be limited. There is even a chance for outperformance!

Investment grade corporate credit, also starting to feel the effects of the beginning of summer, has seen double-digit basis point tightening, investors regaining comfort in the asset class with levels almost fully recovering from the various banking crises seen earlier this year. Additional support is helpfully being provided by central banks far and wide. With risk-free rates sitting considerably higher, investors in the asset class is less needy of every last drop of return.

In EUR we have seen additional liquidity leave the market since our last commentary, to the tune of EUR 508 bn representing the final slug of TLTRO (Targeted Longer-Term Refinancing Operations)  being repaid. This, along with quantitative tightening and a continued “higher from here” sentiment out of the central bank, feels like a perfect storm, much like elsewhere. For now, it is likely we see two further hikes of 0.25% (July and September) bar any disasters. Certainly nearing cycle peak, for now. Eyes are also on the slowdown witnessed in the traditional powerhouse of the Eurozone, Germany, as recent data suggests a slowing.

Helpful for those in the UK still perplexed by how rampant inflation continues to be, and the associated (over-?) steepening of the expected future path of interest rates, is the stronger pound. Being a net importer, for some time home-grown inflation wasn’t enough; we had to import that too for a period. There is still faith in Sterling, which is both good and helpful. We are now back to a point versus the US$ that surpasses her strength since the beginning of 2019.

Current market chatter is that the UK remains different with drivers for price increases being harder to bring down. In particular is the less flexible labour market that remains tight, although the latest Reed Employment Report talks of new job listings dropping significantly and a potential early indicator of a cooling economy. Market pricing sees terminal rates well through 6% with JP Morgan and former MPC voting member Jonathan Haskell (among others) seeing potential for the base rate to reach a staggering 7%.

For now, the US appears to have recovered from banking stresses seen earlier in the year. Changes are afoot to avoid a repeat with regulation formerly rolled back for smaller banks being reversed in order to capture and stem potential liquidity crunches. The market already seems to be fairly competitive for longer-dated funding, the drain on liquidity originating from those maturity “transformed” structures such as money market funds promising liquidity daily – as long as you don’t need it. Further regulation of that industry has been announced, more on that in our broader newsletter for those interested.

Informal central bank speak continues to highlight the 1-month cliff edge not being fit for purpose. There is the potential for more rules to come down the pipes with term funding requirements being touted in the 3-5 month space being more appropriate. In terms of rates, current thinking varies depending on whether you are a central or investment banker. Wall Street sees enough having been done, whilst the Federal Reserve continues to watch the data while touting another 0.25% hike or two being needed. Hikes are predicted to tip over to cuts come March of next year, aiding a “soft” landing. Time will tell.