True Potential Morning Markets

George Bell, Portfolio manager reflects on the challenges presented by a global IT outage impacting a range of sectors, and key political developments as President Biden withdraws from the 2024 campaign rally. As we look to the week ahead, we are expecting to see some strong numbers in respect of US economic growth and corporate earnings, along with an update on US inflation and European business sentiment.

In our round up of the week, Kevin Kidney, Head of Asset Allocation, and George Bell, Investment Director cover the cooling UK jobs market and how it reflects on the global cycle. How the UK is lagging behind the global disinflation cycle but still making modest progress, as well as an unexpected technology headline which has affected equity markets.

Today, Kevin Kidney, Head of Asset Allocation, looks at the weak performance of global equities which followed comments from the Biden administration on exploring further restrictions to western microchip manufacturers and their ability to export to China. Closer to home and the UK employment data continues to paint a rather mixed picture, importantly, wage growth remains extremely sticky, at +5.7%, led by accelerating pay awards within the public sector and private sector pay growth continues to slow. With pay growth and underlying pressures with services inflation, this presents a challenge for the Bank of England for interest rate cuts.

Today, Chris Leyland, Director of Investment Strategy, looks at the new UK inflation data and what it may say about the potential direction of interest rate policy. Services inflation remaining sticky at 5.7% could be a sign for concern with the largest upward contributions coming from the cost of restaurants and hotels. The Bank of England will be watching this figure with a keen eye as it looks to bring in the first interest rate cuts.

Corporate earnings season is in full swing with the US and Europe reporting. Both BlackRock and Goldman Sachs have beat market expectations on earnings. Goldman Sachs saw total earnings rising 150% while BlackRock reported an 8% rise in revenue. We’ve also had comments from Chair of the Federal Reserve, Jay Powell, on the Fed’s dual mandate to foster stable inflation and maximum employment. Markets now place a 97% probability of a 0.25% interest rate cut in September.

As we look to the week ahead, Jeff Casson, Chief Investment Officer, discusses China’s senior leadership meeting at a time where economic improvement is required, with shortfalls in retail and most notably property investment. In the Eurozone, we have several data releases this week but no expectations for any policy changes. In the UK, the Bank of England have key considerations on employment, retail activity and a  focus on services inflation - which has remained stickier than many expected. In the US, the key message from the Federal Reserve is a reluctance to reduce policy restraint too soon so as not to unduly weaken economic activity and employment.

Paul Durrans, Investment Director and Sam Elliott, Investment Analyst cover the US inflation report which came in below expectations. They discuss the market reaction and what this means for US interest rate cuts. Furthermore, they discuss Q2 corporate earnings from the US consumer and banking sector. They finish by discussing the recent data on the UK economy which shows economic activity remains on a stronger footing despite interest rates at elevated levels.

UK growth is exceeding analyst expectations, integral to this has been the service sector supported by wage growth which is outpacing the rate of inflation. These aspects present challenges in themselves and George Bell, Portfolio Manager, looks at recent comments from Bank of England Chief Economist Huw Pill, in which he states that monetary policy needs to be restrictive to squeeze the persistent components out of the system. Will the Bank of England cut rates in August or hold?

Today, Chris Leyland, Director of Investment Strategy, covers comments from Chair of the Federal Reserve, Jerome Powell in which he expressed reassurance on the US economy despite the cooling of data we have seen. What was notable and drove equity markets was the expression of concern in keeping interest rates too high for too long and the detrimental impact that could have on economic growth. Do you think market expectations of interest rate cuts will materialise?

Today, Paul Durrans, Investment Director, looks at US equities which have astonishingly hit all time highs for the 35th time this year. Equities have been supported by corporate earnings expectations, softer inflation data and the ongoing enthusiasm for AI. Looking forward, investors will be paying close attention to the upcoming corporate earnings season for Q2. This week, US companies kick-off reporting with the financial sector in focus, with particularly attention on bank heavyweights JP Morgan Chase and Wells Fargo.