resilient economy

Policymakers at the Bank of England will be scratching their heads this morning wondering what they have to do to get inflation down, with the latest CPI report another setback in the central bank’s ambition of delivering price stability and a soft landing. While there are many reasons to be confident that inflation should fall sharply over the coming months including lower energy and food price contributions, it’s hard to be too optimistic when the data keeps consistently coming in well above forecasts.   There is clearly immense stubbornness in the UK inflation numbers and the fact that the core also unexpectedly rose yet again by another 0.3% will be a huge concern to the BoE. Services inflation was always going to take longer to regain control of and today’s data once again suggests momentum is strong here. Market interest rate expectations are continuing to fluctuate after the release but there’s clearly now a much stronger case for a 50 basis point hike tomorrow, which would take Bank Rate to 5%. What’s more, markets now see it reaching 6% early next year which could be very damaging and increases the risk of the economy buckling under the pressure. The pound initially spiked after the release, hitting 1.28 against the dollar before giving around half of that back. Higher interest rates for longer against the backdrop of a more resilient economy may remain supportive for the pound for now but as soon as the economy starts to buckle, traders may be forced to rethink.   GBP/USD Technical For a look at all of today’s economic events, check out our economic.

Oil It’s going to take a lot to change the minds of energy traders. Fears of a weaker global growth outlook are not going away anytime soon. In the US, good news is bad news as that will suggest the Fed might have to do more tightening. ​ Inflation is stubbornly high in Europe that could trigger a lot more rate hikes and a harsher recession. ​ Even comments from Delta CEO about demand outpacing expectations was unable to provide a boost for oil prices. ​ Oil is looking very vulnerable here as it is getting close again to the spring lows near the upper mid- $60s. One more plunge and that should make OPEC+ very nervous. A drop below the $67.50 level could ​ trigger momentum selling that won’t stop until the $62.50 region.   Gold Gold remains under pressure as the US consumer still looks strong. Today’s economic data in the US painted a picture of a resilient economy that could be subject to further Fed tightening. The ECB also signaled there is no end in sight for their rate hiking cycle and that has also helped send Global Bond yields higher. It has been pretty ugly for gold since early May and if expectations grow for further Fed tightening, that could send gold tentatively below the $1900 level.      

Prioritise quality companies. If an investor needs to take a defensive stance, it is worth turning to quality stocks, as their robust balance sheets and stable cash flows should insulate them from unforeseen downside risk. With this in mind, many of the largest technology and Internet stocks meet these criteria, while exposure to highly cyclical sectors and companies with excessive leverage should be kept to a minimum. Thus, in order to increase the resilience of your portfolios, you should focus on high quality companies, strong dividend payers and also not forget about regional diversification, as lower valuations and a weaker US dollar can also make global stock markets outside the US attractive.   The general understanding is that the market is likely to come out of the correction this year with expectations of a continued recovery in the second half of the year and a return to a bullish trend. This recovery is expected to help recoup portfolio losses from 2022.   However, there are several factors that pose risks to the market in the near future. These risks include the potential for a bear market, which could be triggered by inflation statistics such as the PCE index and strong labour market conditions. Another risk is the narrow scope of the current rally, where only some sectors have shown growth while others, including cyclical, defensive and growth sectors and assets such as bonds, have remained weak. There is also uncertainty about the timing and severity of a possible recession this year. The market is now looking at the likelihood of a moderate recession, which is already factored into current expectations and prices.   Once there is more clarity on these risk factors, portfolio allocation can be adjusted accordingly, considering both bonds and stocks, with a focus on the second half of the year and recovery of losses incurred in 2022. Two scenarios were considered for such an adjustment:   Scenario No. 1, the positive outlook, sees the market rising and breaking through significant resistance levels of 4200-4300 in the SPX index, which would lead to a rally. In this case, it would be prudent to increase long positions. Risky stocks should be held until they reach the most likely level of local recovery, and then locked in. For positions that still have potential, they should be held. The portfolio as a whole should then be rebalanced, creating a new balanced structure with a 25% allocation to cyclical assets, 35% to growth assets, 10% to protection and 30% to bonds.   Scenario #2, the negative outlook, assumes that the market continues to decline either from the current level or below 4100. In this scenario, protection should be strengthened by using inverse ETFs and reducing long positions (using stop losses) until the target stock is reached. This approach aims to minimise further drawdown until the correction is finally resolved in 2023.   The US stock market has thus experienced a strong recovery since the start of the new year, supported by a resilient technology sector, growth in the semiconductor industry due to AI development, a strong Q1 2023 reporting season, a pause in the Federal Reserve's rate hike, expectations of future rate cuts, lower inflation, a resilient economy, a smooth economic landing and a debt limit increase. While risks are still present, a focus on longer-term investment strategies can help investors benefit from the market's upward trajectory and continued recovery in 2H.  

US The week before the July 26th FOMC meeting will contain a handful of key economic reports and several key earnings results. The initial assessment of the economy is somewhat upbeat as CEO Jamie Dimon noted that the US economy continues to be ‘resilient’. Next week’s big earnings include Goldman Sachs, Tesla, Netflix, Morgan Stanley, and American Express.   On Monday, the ISM manufacturing report will show activity is slowing down, with the headline reading expected to fall back into contraction territory.  On Tuesday, the June retail sales report is expected to show strength, as major car discounts encouraged buying.  Demand for services might still remain strong but is expected to weaken once we get into the fall.  Industrial production probably won’t impress given the weakness we saw with the PMI readings.  On Wednesday, both building permits and housing starts should show some weakness.  Thursday’s releases include jobless claims which might only show modest labor market sluggishness and some weaker existing home sales.  Eurozone President Christine Lagarde’s comments at the ECB conference in Frankfurt on Monday may be the highlight next week as traders try to better understand whether the central bank is as close to the end of its tightening cycle as they think. The ECB has pushed back before but the data is looking on a much better trajectory. Final HICP inflation figures will also be released on Wednesday. UK  UK inflation data on Wednesday is undoubtedly the one to watch next week. It seems we’re seeing progress on inflation everywhere except the UK at the moment. The headline is expected to fall back to 8.2% for June, with core staying at 7.1%. But both have surpassed expectations on numerous occasions recently as inflation has remained stubbornly high. Are better readings from the US and eurozone a sign of things to come for the UK, finally? Retail sales will also be released on Friday.  

Middle East tensions set to see lower European open US markets finished the week higher after the latest September jobs report showed the US economy added a staggering 336k jobs in September, while August was revised up to 227k, pushing long-term yields sharply higher, and the US-10 year and 30-year yield hitting fresh 16-year highs.   Having spent most of the last few weeks fretting about the prospect of another rate hike and higher rates for longer the thinking now appears to be that a resilient economy and jobs market could mean that companies will be able to deliver better revenues and earnings growth, even with yields at current levels. While that logic comes across as sound on the face of it that rather precludes the idea that rates can't go higher from here. Before the horrific events in Israel over the weekend, the market was pricing in the probable prospect that we may get another 25bps rate hike in November, however what happens if the decline in oil prices that we saw at the end of last week takes another sustained leg higher, if those events morph into a wider crisis across the Middle East?     Consumers may well be resilient now and able to absorb a few more months of rising prices, but the recent pay settlements agreed in recent weeks have yet to feed through into the wage numbers which might mean the US central bank has to raise rates by more than is currently priced.   In a sign that the US consumer is already reaching its limits when it comes to spending on credit cards, US consumer credit for August declined by -$15.6bn, the most in 3 years, against an expectation of an increase of $11.7bn. Some of that decline may be down to the resumption student loan repayments, while auto-loan payments also fell.     That said the events over the weekend and the Hamas atrocities in Israel, and the latter's reaction to them and subsequent declaration of war, have prompted a move into the US dollar, gold as well as a modest bid into bonds, as concerns over escalation risks move to front of mind. With the US Columbus Day holiday likely to keep US trading activity subdued, we expect to see European markets open modestly lower this morning, while oil prices have rebounded from the lows of last week.    For now, the market reaction has been fairly contained as we look towards this week's release of the latest Fed minutes as well as the September CPI report, but attention will never be far from events in Israel given the risk we could escalate further if Iran gets drawn into the fray, which is entirely possible if Israel decides that it bears responsibility for the attack.     EUR/USD – continues to pull away from the lows of last week, with support at the 1.0400 level which is 50% pullback of the 0.9535/1.1275 up move, followed by 1.0200. To stabilise we need to move through 1.0620 for a retest of the 1.0740 area.    GBP/USD – the rebound off the lows last week at the 1.2030/40 area, needs to overcome the 1.2300 area to signal a move back to the 1.2430 area and 200-day SMA. A move below 1.2000 targets the 1.1835 area which equates to a 50% retracement of the move from the record lows at 1.0330 to the recent peaks at 1.3145.       EUR/GBP – still range trading with resistance at the 0.8700 area and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a move back to the 0.8620 area.   USD/JPY – has managed to hold above the spike lows of last week. With no official confirmation that intervention took place, any further moves back to the 150.16 highs could be choppy. Below 147.30 signals the top is in and a possible move towards 145.00.   FTSE100 is expected to open unchanged at 7,494   DAX is expected to open 71 points lower at 15,158   CAC40 is expected to open 24 points lower at 7,036