The digest
Global equities finished relatively flat last week following the release of the US July employment report. The MSCI World Index closed the week up 0.21%, the S&P 500 Index closed the week up 0.4%, the STOXX Europe 600 Index was down 0.6%, whilst the MSCI Asia Pacific Index was up 0.3%.1 The US reported very firm job gains in July, with nonfarm payrolls coming in at 528,000, which was higher than expected. However, average weekly earnings have slowed from the highs and are in deeply negative territory in real terms.
After the release of the jobs report, investor attention quickly turned to the Federal Reserve (Fed), with a 75 basis point (bp) interest-rate hike now expected for September. Two more Consumer Price Index (CPI) reports are expected before that announcement, the first of which is on Wednesday this week.
The other key focus last week was the Bank of England’s (BoE) policy meeting. The central bank hiked rates by 50 bps, which was largely as expected, but it was the bank’s estimates for a five-quarter recession starting in the fourth quarter of 2022 which garnered the most attention.
Energy prices were a focus once again last week, with oil prices at their lowest level since Russia’s invasion of Ukraine. Yet, geopolitical tensions between Russia and Europe remain heightened, with gas supplies restricted by Russia’s political posturing. Meanwhile, US Speaker of the House of Representatives Nancy Pelosi’s visit to Taiwan has caused some shockwaves and signalled a deterioration in US-China relations.
US jobs report—good news bad news for equities?
As stated, July’s employment report came in at an impressive increase of 528,000 jobs, well ahead of expectations. The report is a good sign for the US labour market and the broader US economy in general. The risk for equity markets is that the Fed is likely to have to do more to cool inflation. The Fed raised rates by 75 bps at the end of July, which followed a 75 bp hike in June. The market is now pricing in an 80% chance of another 75 bp hike by the Fed in September. The jobs report seemed to end hopes of an imminent dovish pivot as it throws cold water on the idea of a significant cooling in labour demand. Comments from various Fed speakers last week were notably hawkish even before the data was released, noting high inflation.
BoE challenges for the UK economy
Last Thursday’s BoE policy meeting provided a stark reminder of the challenges facing the UK economy. As expected, the Monetary Policy Committee raised interest rates by 50 bps, taking the base rate to 1.75%, and detailed plans for Quantitative Tightening (QT). The bank has now raised rates for six meetings in a row. However, what drew the most attention was its bleak outlook for the UK economy. The fourth-quarter inflation target was raised to 13.2%, and the central bank predicted the UK economy would enter a recession in the fourth quarter that would last through all of 2023.
The central bank decided to hike quite aggressively in the face of an economic downturn, meaning it is preparing for a hard landing to bring inflation back to target.
Key takeaways from the BoE meeting:
-
- Interest rates were raised by 50 bps (to 1.75%) for the first time since 1995. Vote was 8 to 1, a convincing majority.
- QT for after the September policy meeting at a pace of £10 billion a quarter, £80 billion total cut to gilt holdings in the year from September, including redemptions.
- UK inflation is seen peaking at 13.2% in the fourth quarter as average energy bills will likely increase by 75% to around £3,500 ($4,240) in October.
- Inflationary pressures have “intensified significantly,” the BoE said. “The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom.”
- The BoE sees UK economy entering recession from the fourth quarter. Predicting a recession that lasts for five quarters, so all the way through 2023, with a gross domestic product (GDP) decline of 2.1%.
- Guidance of forceful action if inflationary pressures persist was kept. That may put further 50 bps moves on the table at upcoming meetings.
- BoE Governor Andrew Bailey said “all options” are on the table for future meetings.
The British pound finished the week down 82 bps vs the US dollar. In the gilt market, the two and 10-year yield curve inverted for first time since 2019, a relatively reliable lead indicator of a recession.
Europe
European stocks traded down last week following a late sell-off after the US employment report release. Sentiment appeared relatively supportive throughout the week in equity markets, despite a series of headwinds lingering. The BoE announcement was the clear focus for the region. European industrials remain a focus for investors, with power prices surging to new highs again last week. In addition, the Rhine water level is at its lowest in 25 years. This could have significant impact on industrial production in the region; supply chains have become disrupted once again as goods cannot be shipped to end markets. There are reports of France having to run nuclear on lower output levels as there is not enough water to cool the reactors.
Last week was the 24th consecutive week of outflows from Europe-focused funds.
In terms of sector moves, banks outperformed given the expected higher-rate environment, and the BoE announcement and hawkish Fed in mind. For the same reason, real estate stocks struggled, finishing down last week. Crude oil prices saw their biggest weekly drop last week since March 2020, putting oil stocks under pressure. Despite the headwinds, the latest corporate earnings season has surprised to the upside. Energy has been the winning sector so far, whilst real estate has been the losing sector.
United States
US equities recorded small gains last week as the July employment report alleviated recession fears a little. The S&P 500 Index closed up 0.4%, recording its third straight week of gains. Geopolitics was a focus for US markets as House Speaker Nancy Pelosi visited Taiwan, renewing tensions with China. Prior to the visit, China threatened “serious consequences” if Pelosi went ahead with her visit. The extent of China’s intended response is unknown, with investors fearing that global trade could be impacted.
There was a clear rotation in the US equity markets last week, with energy stocks selling off and technology stocks rallying. Energy has been the standout performer year-to-date, so with West Texas Intermediate crude oil prices down nearly 10% last week, investors decided to take some profits. Low market volumes likely exacerbated the selloff in the sector. Technology stocks outperformed amid solid earnings in the space. The outlook remains constructive, and value stocks have been delivering stronger revenue and earnings-per-share than growth stocks.
Asia-Pacific
Asian equities traded higher overall last week, with the MSCI Asia Pacific Index closing the week up 0.25%. The escalation in US/China tensions is a focus for the region. Chinese equities were in risk-off mode last week as foreign investors reduced their exposure amid a ramping up of geopolitical risks. July’s Purchasing Management Index (PMI) report also weighed on sentiment. It missed expectations, indicating that the recovery may be short-lived, especially as COVID-19 control remains a key focus for the government.
However, trade data reported over the weekend showed China’s exports are expected to maintain a high rate of growth in the third quarter, while Chinese imports are expected to experience a further recovery. The significant increase in exports to the European Union influenced by tight energy supply, provided a key boost to exports in July.
The week ahead
Monday 8 August
-
-
- Eurozone investor confidence
-
Tuesday 9 August
-
-
- US NFIB Small Business Optimism; Non-Farm Productivity; Unit Labour Costs
-
Wednesday 10 August
-
-
- Italy CPI
- Germany CPI
- China CPI, Producer Price Index (PPI)
- Japan PPI
- US CPI, real average earnings
-
Thursday 11 August
-
-
- US PPI, jobless claims
-
Friday 12 August
-
-
- UK GDP, imports/exports; Industrial Production (IP); Manufacturing Production; construction output; total business investment
- France CPI
- Spain CPI
- Italy trade balance
- Eurozone IP
- US import/export price Index; University of Michigan Sentiment, current conditions, expectations
-
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
Past performance is not an indicator or guarantee of future performance. There is no assurance that any estimate, forecast or projection will be realised.
Links to External Sites
Franklin Templeton is not responsible for the content of external websites.
The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).
Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use, and other policies of each site you visit as we have no control over, and assume no responsibility or liability for them.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
Views you can use
US equities: opportunities and turbulence
Franklin Equity Group Portfolio Manager Grant Bowers shares his outlook on inflation and recessionary risks and where he’s finding opportunities in US equities amid recent market volatility. Read more:
PODCAST: Increasing yields, strategy shifts for investors
Rapidly changing economic and market conditions could lead to a shift in strategy for income investors. Ed Perks, chief investment officer of Franklin Templeton Investment Solutions, breaks down the macro environment and shares the fixed income sectors he believes are now attractive, in this conversation with our Josh Greco. Read more:
Are we there yet? Fed Chairman Jerome Powell hedged himself carefully at the July press conference; markets heard it as confirming expectations that we are closing in on the terminal rate and that the Fed will likely start cutting again as early as March of next year. Our Fixed Income CIO Sonal Desai is not so sure—here are her thoughts: Read more.
Investing in infrastructure: Why now?
Infrastructure has recently seen increased attention as broad equities have been weaker in 2022 due to inflation, rising interest rates, global supply chain disruptions from COVID-19 and the war in Ukraine. Shane Hurst, Portfolio Manager with ClearBridge Investments, discusses the opportunities and potential income benefits for investors in the space today. Read more:
______________________________
1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. Source: Bloomberg, “Bailey Says BoE Concerned UK Companies Are Raising Their Prices,” 5 August 2022.