The InvestSense Podcast

Wrapping up this year's Portfolio Construction Forum Strategies Conference.

Fed Chair Jerome Powell's Speech at Jackson Hole SymposiumThe week began with great anticipation for Fed Chair Jerome Powell's speech at the Jackson Hole Economic Symposium. While some expected ground-breaking announcements, Powell's speech proved to be relatively anticlimactic. Doves interpreted his remarks as a signal that there would be no immediate plans for additional rate hikes, while hawks noted that Powell mentioned hypothetical situations that could warrant tightening in the future. Overall, Powell emphasized the need to anchor inflation at 2% and take a gradual approach to assess the impact of previous rate hikes.‍European Central Bank (ECB) President Christine Lagarde's MessageIn a similar vein, ECB President Christine Lagarde reiterated the ECB's commitment to maintaining high interest rates for as long as necessary to achieve the 2% inflation target in the Eurozone. This aligns with the ECB's ongoing efforts to stimulate economic growth.‍Eurozone PMI Data and Consumer ConfidenceHowever, economic data from the Eurozone painted a less optimistic picture. The Eurozone, French, and German Purchasing Managers' Index (PMI) readings were weaker than expected, with services falling below consensus and manufacturing showing slight improvement. Additionally, the European Commission's index of Eurozone consumer confidence fell to -16, indicating a negative sentiment among consumers.‍UK PMI Data and US Housing MarketIn the UK, PMI data fell short of expectations, particularly in the manufacturing and services sectors. On the other hand, the US housing market experienced a significant decline in existing home sales, reaching the lowest level since the aftermath of the US housing bubble in 2010. This was attributed to rising mortgage rates, which deterred potential buyers.‍China Lending Policy Rate ReductionsIn China, the reductions in lending policy rates were less significant than anticipated. The People's Bank of China (PBoC) reduced the 1-Year Medium-Term Lending Facility Rate by 15 basis points to 2.50%. However, the 1-Year Loan Prime Rate was only decreased by 10 basis points to 3.45%, while the 5-Year rate remained unchanged at 4.20%. This conservative approach may be aimed at preserving banking sector profitability and preventing excessive depreciation of the Chinese yuan.Overall though, several factors contributed to the erosion of confidence in China's economy. Disappointing data, signs of deflation, record youth unemployment, and continued liquidity issues in the debt-laden property sector played a significant role. These factors have raised concerns about China's economic growth and the government's limited options to address the downturn. As a result, there has been an increased prospect of accelerated capital outflows, with overseas funds selling the equivalent of USD 10.7 billion from the mainland market over a 13-day trading period.Despite these challenges, analysts believe that the risks of a systemic crisis stemming from China's property sector are relatively low. Increased regulation has led to a smaller "shadow" banking system, including trusts, compared to previous years. While risks persist on the periphery of the financial system, they are potentially resolvable through regulatory intervention. Nevertheless, analysts continue to monitor developments in the property sector and potential spillover effects on other sectors.‍The Australian Reporting SeasonThe Australian stock market experienced mixed results during the reporting season. The retail sector, in particular, last week showcased the contrasting performances we have seen in this reporting season. Premier Investments saw a surge of 12.3% after forecasting near double-digit sales growth, while Breville Group experienced a nearly 10% increase in its stock price, primarily driven by strong sales of coffee machines. However, A2 Milk faced a decline of over 13% as the company flagged a slowdown in demand, influenced by falling birth rates in China.Mining giant BHP reported revenue and profits slightly below expectations, contributing negatively to the overall performance of the Australian stock market. On the other hand, Woodside, a major player in the gas industry, managed to avoid industrial action that could have threatened global LNG supply, positively impacting the market.Coles, a prominent supermarket chain, saw a decrease in its share price as it missed expectations, while investors responded positively to Woolworths' results. Ramsay Healthcare suffered a decline in its share price and faced challenges, and Wisetech experienced a significant setback as its shares were slashed by a fifth due to the company's failure to deliver guidance. Qantas, however, reported soaring profits and announced another buyback scheme, further boosting the market.‍Looking Ahead‍Upcoming US Labor Market ReportsLooking ahead, the US labor market reports will be closely watched. The Job Opening and Labor Turnover Survey (JOLTS) will provide insights into the number of unfilled jobs and the voluntary quit rate. Additionally, the upcoming payroll report is expected to show an increase of 168,000 nonfarm jobs, with an unchanged unemployment rate of 3.5%. Average hourly earnings are projected to rise by 0.3% month-on-month and 4.3% year-on-year.‍Eurozone Inflation Data and ECB Rate Hike ExpectationsThe Eurozone preliminary inflation data for August will be significant in determining the likelihood of additional ECB rate hikes. Market expectations suggest a 34% chance of a 25 basis points hike in September, rising to 52% by October. However, the potential risk of a recession in the second half of 2023 may limit the ECB's ability to tighten monetary policy further.‍US Home Prices and Eurozone Inflation ReadingsIn the US, the S&P Case-Shiller Home Price Index is expected to show a 0.8% month-on-month increase in home prices, approaching the record high of June 2022. Meanwhile, Eurozone inflation readings will provide further insights into the trajectory of inflation and its implications for ECB rate hikes. It is crucial to closely monitor these indicators to gauge the overall economic landscape.

Amidst the concluding chapters of COVID-19 and its market upheavals, the global economic landscape is teetering on the brink of a potential regime change. This article dives deep into three distinct economic scenarios – Bull, Bear, and Muddle-Through – each outlining varying futures shaped by productivity gains, global debt, and decision-making by central authorities. In an environment where economic forecasts often teeter around existing numbers, outliers might offer the most actionable insights. As market dynamics pivot, the challenge lies in identifying undervalued opportunities that promise substantial returns, echoing historic market rebounds like the post-Dot Com era. The conference aims to distill these insights and offers a platform for informed investment choices.

Last week markets continued in general to be on the back foot, particularly China, while global cyclicals remained strong.

Global markets experienced a mixed week, as Fitch cut the US government's credit rating, while earnings were resilient.

Markets were again flat to slightly positive last week which means that, barring an overnight mishap in the Northern Hemisphere, most equity portfolios will be up another 2-3% for the month.

Last week was uneventful and markets have been more or less flat for the last 10 days, with the exception of the UK, which rallied on the news that inflation was not as high as expected (though still higher than most places), plus some of the economic data has not been quite as dire as has been expected.

Most markets were up last week and while tech stocks and AI beneficiaries continued to lead the way the rally was more broad-based than we have seen recently, with most sectors and markets up by 2 - 5%.

Last week we saw some volatility creep into markets as we turned the page on a new financial year. US labour data was mixed but just strong enough to suggest that higher rates might be around for a bit longer. This caused some volatility in bond markets, with short term (2 year) rates up again and hitting 15-year highs.