Market news and views from the Managed Portfolio Service investment team.
In Brief
- Not so Wicked Federal Reserve meeting minutes but strong US economic data.
- China’s gentle steps, encouraging stimulus in Japan, pressure on the PIGS.
- It’s the bond markets that have got us excited.
Rotation
Although important to all fans of The Wizard of Oz, we are not referring to the launch of the much awaited film starring Ariana Grande and Jeff Goldblum, instead we are highlighting the release of the Fed minutes, which were far from Wicked! The word “gradually” was of utmost importance, as the minutes highlighted the committee feels it’s on the path to lower interest rates.
The strength of US economic data and the confidence the consumer has in its incoming government was notable again. The Russell 2000 Index, which tracks US smaller companies, was up +4.3% over the last five days with strong services data and consistent jobless claims boosting share prices. There has been a clear broadening out of returns over the last two weeks which is very encouraging.
China also took an interesting step Thursday evening to extend the tariff exemptions on specific US items. This was good for the US but also a sign of a strategic move to maybe soften tariffs coming their way under the new US government. The Chinese Shanghai Shenzhen CSI 300 Index is up over +19% over the past three months and there are expectations of further policies to stimulate the economy.
Across the water, the Japanese Nikkei 225 Index remains one of the best markets this year, up +14.2%, yet it has remained flat following the summer’s volatility. A lot has to do with interest rate expectations. There are clear worries inflation and rate rises will lead to earnings risk for Japanese corporates. Encouraging signs did come from Ishiba’s new government as it announced $250bn of stimulus focused on lower income households, higher thresholds before tax and subsidies for corporates and consumers. The strength of the Yen meant markets in sterling terms are broadly flat on the announcement.
In Europe, the direction of travel can be more important than the destination – this can be seen in the turn of PIGS – Portugal, Ireland and Greece and Spain. A very different picture to a decade ago, as the core of Europe – France + Germany – are facing increased pressure from more fractious politics. With the French budget being contested by Le Pen’s National Rally party, French 10-year yields now trade at the same level as Greece.
Whilst equities have had a positive week across the board, it’s the bond markets that have got us excited. US and UK government bonds have rallied significantly. Trump nominated Scott Bessent, a hedge fund manager and experienced macroeconomist, as US treasury secretary.
The UK 10-year yield has moved from 4.4% to just shy of 4.2% in the week. UK retail sales fell more than expected in the month, with blame put on the UK Budget once again.
Within the next couple of weeks we will get clearer indications on central bank interest rate changes. The European central bank is edging closer to cutting rates by half a percent, the Bank of England is unlikely to cut rates based on last week’s inflation data, whilst the Federal reserve may do one more rate cut. What is likely is that the Federal Reserve will pause cuts into early next year with inflation risks and strong economic data. We shouldn’t really complain about this because when the US economy is strong, so is the global!
Looking ahead
China will gives its latest update on the state of the economy with its manufacturing and services PMIs, with the US following suit on Wednesday. Crucially the US non-farm payrolls will really indicate economic strength with expectations it will add another 200,000 jobs.
The word ‘gradually’ was of utmost importance in the US this week