31st July 2023

Good Morning,

Equities moved higher last week, as did interest rates (more info below). The Federal Reserve, having been at 0% during the COVID lockdowns are now, following 11 rate hikes, at a level of 5.25%-5.5%. The Bank of England is expected to join them at 5.25% later on this week as the UK grapples with one of the highest debt interest burdens in the developed world. Not to feel left out, the ECB raised for the ninth consecutive time on Thursday to 3.75% – a record high for the single currency bloc and a level last reached in 2001. The Bank of Japan also altered their ‘yield curve control’ mechanism, sending bond yields higher.
This of course has explicit consequences throughout investment markets and the wider economy. Some of you (admittedly the authors do not) will remember the high mortgage rates that characterised the 1970s and 80s. However, this does not preclude equities from strong returns – as were seen for the majority of that period. As mentioned in our recent Investment Outlook, once rates do settle at the terminal rate, companies have a degree of certainty and economic growth can stabilise. In conclusion during periods of higher inflation and interest rates, long term exposure to equities remains the best way for investors to maintain purchasing power and make real returns.

Weekly Investment News

Last week saw several major central banks deliver interest rate decisions. In the US, the Federal Reserve increased rates by 0.25% to a range of 5.25%-5.50%. This has been the 11th rate increase out of the Fed’s last 12 meetings. Despite some implications in the Fed’s messaging that another hike may occur in September, general sentiment in markets was that this may be the Fed’s final hike of their tightening cycle, potentially paving the way for a ‘soft landing’ in the US. A soft landing would imply that the Fed has brought inflation under control, whilst avoiding a recession. US equities enjoyed a positive week as a result, showing gains in tech-heavy growth areas in particular. On Friday, the US Bureau of Economic Analysis released results for last month’s core personal consumption expenditures price index (PCE), also known as the Fed’s preferred measure of inflation. The release showed core PCE rose by only 0.2% month on month, displaying a reduction in goods prices and increase in services costs. Year on year the figure was 4.1%, below expectations of 4.2%. The figures showed further moderating of US inflation. General positive sentiment was also aided by US Q2 GDP figures, which came in at 2.4% well above estimates of 1.8%, displaying strong growth in the US economy.

In the EU, a 0.25% hike was also delivered by the ECB, bringing the deposit rate higher to 3.75%, its highest level in just over 22 years. What caught investors’ attention however was the toning down of hawkish sentiment that has become standard reading within each of its policy statements. The removal of these suggestions leaves open the possibility for a pause in September.

Finally in Asia, the Bank of Japan surprised investors by enacting a historic change in policy direction by partially loosening tight controls on bond yields. For the past seven years Japan has operated under a strict policy regime known as yield curve control, leaving it as an outlier in terms of global monetary policy. Last weeks could represent the beginning of a new direction from the BoJ.

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