Sovereign Wealth Partners and InvestSense Pty Ltd
July was a relatively strong month across the board for markets with almost all asset classes having made gains. Leading the way was emerging market equities, returning +4.9% thanks to strong gains in the ex-China region, especially Eastern Europe and Latin America. The other side of that coin is that Chinese market returns have been relatively lacklustre, although the market has been highly polarised, and the large tech or EV companies that Western firms tend to be exposed to have been doing well. During the month Xi Jinping made it clear that the crackdown on these firms is over and is now appealing to overseas investors in his bid to rejuvenate the flagging economy. Economic data across the world came in looking weak in July, however it wasn’t quite as dire as had been expected and as a result, markets mostly took them in stride.
Overall, consumers (particularly in the US) have been resilient, while inflation pressures appear to be receding, and wage inflation remains relatively constrained. The Fed raised rates one more time by 0.25%, very much as expected, and Jerome Powell managed to say nothing that would upset markets about their future intentions. On the face of it, it could hint to the immaculate disinflation and soft landing that markets have been hoping for. Meanwhile in Australia, trends may look worse, with retail faltering, especially given July’s weak retail sales number that put the market on the back foot. Australia’s inflation print for July surprised on the downside, which was good that the market liked, but perhaps related to weak sales. This may be a reminder to be careful what we wish for, highlighting that this soft landing is a narrow path to stay on, and a lot can go awry betwixt and between. Turning to the bond markets, the investors remain highly focused on the near-term intentions of central banks (and the US Fed in particular) as well as longer term rates which declined over the month. One issue that may be slipping beneath the radar is that slowing inflation combined with cautious, determined central banks might actually mean higher real rates and, effectively, unintentionally tight monetary policy.
Looking ahead, market participants should keep an eye on several key events. The Reserve Bank of Australia (RBA) rate decision is scheduled for next week, providing insights into the central bank’s monetary policy stance. Additionally, the Bank of England’s policy meeting and July US jobs data will offer further guidance on the global economic landscape.
The Federal Reserve’s preferred inflation measure, the PCE, is set to be released, potentially introducing more volatility into the markets. Investors will be keen to observe if weaker inflation readings influence officials to shelve plans for further interest rate hikes, potentially leading to a rate cut early next year.
One of the key events globally this week is the interest rate decision by the Bank of England (BoE). Policymakers will meet on Thursday to discuss monetary policy and are widely expected to raise rates to a 15-year high. The exact magnitude of the rate increase, whether it will be 0.25 or 0.5 percentage points, remains uncertain, with investors divided on the outcome.
The decision to raise rates comes as the UK grapples with persistently high inflation, although June saw a slight drop to 7.9%. Some argue that the lower rate increase is justified by this dip in inflation, while others believe a stronger move is necessary to curb rising prices. Regardless of the magnitude, the rate hike signifies the ongoing global battle to tame inflation and stabilize economies.