Equity markets rebounded strongly last week, with global equities up 3.8% in local currency terms and 2.8% in sterling terms, as US recession worries faded and belief in a soft-landing was restored.
Just as tech stocks led the recent market correction, they have also led the recovery with a gain of 6%. So too have Japanese stocks which have now more than recovered the double digit drop seen the Monday before last. As for US equities, they gained last week 2.9% in sterling terms while UK stocks, which had rather less to recover, were up 2.1%.
So where do we now stand after the histrionics of the last few weeks? Global equities are up 7% in local currency terms from their 5 August low and 2% below their mid-July high. In sterling terms, the comparable numbers are +6% and -1%.
Bonds, by contrast, had a quiet week with both Gilts and Treasuries little changed. Bond yields have reversed some of their decline during the equity sell-off but remain significantly below their levels in mid-July, particularly in the US. 10-year Treasuries and Gilts both currently yield around 3.9%.
The revival in market confidence has been driven in good part by the US data released since the payroll numbers which sparked the recession worries in the first place. Last week’s news of a larger than expected gain in retail sales in July eased worries of an impending slowdown in consumption. Initial unemployment claims were also lower than forecast, suggesting the labour market is not weakening as much as feared.
Just as important were the July consumer price numbers. These were in line with expectations and showed the US core and headline inflation rates both slowing 0.1% from June to 3.2% and 2.9% respectively. The numbers were viewed as good enough to allow the Fed to start cutting rates in September. Even so, hopes on this front have been scaled back since the height of the sell-off and rates are now expected to be reduced next month only by 0.25% rather than 0.5%.
Here in the UK, the latest inflation numbers came in a bit lower than forecast. The headline rate ticked up to 2.2% from 2.0% but the more important core rate eased to 3.3% from 3.5%. Furthermore, service sector inflation, which is a major focus for the Bank of England and where inflation pressures are most entrenched, slowed to 5.2%.
Underlying wage growth also eased in June to 5.4% although remains significantly above the level compatible with 2% inflation. The unemployment rate saw an unexpected drop to 4.2% but the survey behind these numbers is unreliable at the moment and most likely the labour market continues to weaken but not dramatically so.
We also had second quarter growth numbers released which showed the recovery continuing at a faster pace than had been expected a few months ago. UK GDP was up a healthy 0.6% over the quarter following a 0.7% rise in the first quarter.
All this left the market continuing to believe the BOE is most likely to leave rates unchanged at their next meeting in September with the next cut having to wait until November.
Elsewhere, the Japanese economy bounced back to life in the second quarter, having languished in recession territory for the previous three quarters. In China, however, the latest crop of numbers for July were on the disappointing side and show the economy is still struggling to pick up much momentum.
While the economic data were the focus last week, geopolitical concerns remain elevated, particularly with the Iranian response to the earlier Israeli Hamas and Hizbollah assassinations still potentially to come. Even so, oil prices remain relatively becalmed at around $80/bb. The gold price, by contrast, hit a new high of $2500/oz last week boosted by a combination of geopolitical jitters, a weaker dollar and prospective US rate cuts.
This coming week is relatively light on economic data, although the August business confidence numbers for the US, EU and UK on Thursday will be watched more closely than normal. Instead, the highlight will be the annual central banking fest in Jackson Hole in the US. The main act will be Fed Chair Powell’s speech on Friday with BOE Governor Bailey’s speech the same day no more than the supporting act. But if it’s pzazz you’re after, the US Democratic Convention starting on Monday will be the undoubted winner.
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