August 2022 Mid-Monthly Update
As the earnings season continued, there was little to disturb the rally in equities with the US S&P 500 finishing last week with a fourth straight positive week. Bonds gave back much of the gains from July with US and UK ten year government yields increasing 25bps. Even raised geopolitical pressures didn’t reverse the rally in stocks. While the earnings season looked satisfactory to date, the following charts from Absolute Strategy Research demonstrate the positive influence of energy and financial companies:
The two big stories data-wise came from the US:
- US Unemployment data released on 5 August
- US Consumer Price Inflation (CPI) released on 10 August
Other data released in the first half of August pointed to a weaker US economy which was important given the stronger than anticipated unemployment report. Since pessimism peaked in May/June, equity and bond investors have begun to adopt a glass half full attitude whereas, for most of the rest of 2022, the glass appeared to be decidedly half empty. Bond investor optimism ran out of steam in the first half of August.
The US unemployment rate dropped to 3.5% with the addition of 528,000 jobs in July, well above estimates. Markets viewed this release as another reason for the US Federal Reserve to move more quickly on raising rates to slow the economy and inflationary pressures. They would then have to cut rates as early as the first half of 2023 as the economy and inflation subsided. A problem arising from the report was the rate at which wages rose in July. While not at the highs of March, wages are still running above 5% year on year as the following graph from Trading Economics shows:
Source: Trading Economics
While unions are not as strong as in the past, employees groups have formed to improve working conditions/practices/wages as has happened at Starbucks on the East Coast of the US and mimicked by their counterparts on the West Coast. Unemployment needs to rise to take the pressure of wages. There may be good news for the US central bank, coming from a slowing housing market as the following graph from Absolute Strategy Research illustrates:
US Consumer Prices showed improvement to be up 8.5% over the 12 months to July after being up 9.1% for the 12 months to June. The month-on-month figure was unchanged after 1% plus increases in the previous two months. A significant 7.7% reduction in ‘gas’ prices offset increases in food and shelter (rents). Unsurprisingly, over the twelve months to the end of July, energy prices were the major influence (see below):
The unchanged month-on-month number and the lower year-on-year numbers were enough to sustain the equity rally amid hopes of a lower trajectory of US Federal Reserve rate increases. While those were quickly scotched, the cheapness of quality growth stocks as a consequence of their sharp falls earlier in 2022 enabled them to continue their rebound.
In the UK, the Bank of England raised base rates by 0.5% on 4 August. UK economic output (GDP) growth was negative for the month of June when released on 12 August by the Office for National Statistics (ONS). The Bank is perhaps behind the curve having decided not raise base rates by 0.5% at the previous opportunity. It decided to do so on 4 August in the face of a slowing economy, albeit with a still tight labour market but an impending cost of living crisis. That same cost of living issue from energy prices skyrocketing will, in all probability, deliver recession across Europe, including the UK.
Chinese data continued to be soft with a lot of focus on the property sector and China’s attitude towards its neighbour, Taiwan, after Nancy Pelosi’s visit raised tensions in the region.
After investing some cash in July, we have been content to retain cash allocations at a little over 10% given the ongoing uncertainties surrounding economies, policies and politics. It has been rewarding to witness the rebound in the performance of our quality growth themes.