Sovereign Wealth Partners and InvestSense Pty Ltd
August saw a delicate balance between economic indicators and market sentiment play out in markets. The United States enjoyed what appears to be Goldilocks labor conditions, with strong job growth and a narrowing labor market. The country added 187,000 new jobs in August, surpassing expectations. While the unemployment rate rose slightly to 3.8%, it was due to a positive influx of new workers into the labor force. The number of unfilled jobs per unemployed person decreased, indicating a tightening labor market. Consumer confidence took a hit as the Conference Board Consumer Confidence Index fell below expectations. The Australian stock market experienced mixed results during the reporting season. The retail sector, in particular, showcased the contrasting performances we have seen across the market in this reporting season. For example, 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. In China, the People’s Bank of China (PBoC) implemented measures aimed at stabilizing the housing market and boosting consumption. These policy measures indicate a cautious effort by Chinese authorities to support sentiment and stimulate consumption. However, concerns remained about the urgency of policy changes and their long-term impact on investor psychology. In the Eurozone, inflation remained a topic of interest. Eurostat reported a marginal decrease in core CPI for August, with non-energy industrial good prices and services showing modest increases. Headline CPI remained unchanged, driven by higher energy prices and strength in non-energy industrial goods. These figures highlighted the ongoing challenge of managing inflationary pressures in the region.
‘Mixed’ seems to be the ‘mot du jour’ in markets at the moment whether referring to inflationary forces or corporate earnings results. This dichotomy points to two potentially very different views of the world – one where cashed up consumers are spending their last COVID cheques with reckless abandon while the underlying economy implodes and the other where distortionary impacts inflation, particularly in the US, are still being felt and may be with us for a while. The distribution of expected inflation and GDP growth amongst economists for the next three calendar years are as follows:
• There is now strong consensus around an ‘immaculate disinflation’. If that doesn’t happen many people will be surprised and markets will be upset (especially bonds).
• There is still considerable uncertainty about whether the US economy will enjoy a soft landing or endure a recession. This level of disagreement could actually mean that markets are somewhat resilient in the face of recession as neither scenario is completely priced in.
We have been looking at this not just because it is what every asset allocator and investor is looking at right now but more specifically because of two interesting theories we came across last week from economists that we rate very highly and which tie in with the work we have done on scenarios recently with the Portfolio Construction Forum.