In the US, consumer spending continues to defy even the worst expectations. In July, retail sales rose by 1%, coming in well above the consensus forecast. This supports our view that the US economy will experience a soft landing.
There’s a glimmer of hope for Sweden’s economy: the new orders component of the purchasing managers’ index (PMI) has moved into expansion territory. This is good news for the export sector, which has been boosted by the country’s weak currency. The rebound in exports could limit the severity of a recession triggered by sharply rising interest rates and falling property prices – two factors that have weighed heavily on consumer spending.
The Bank of England’s latest rate hike has started to have an impact on the UK economy, and particularly the property sector. In August, the RICS UK Residential Market Survey recorded its sharpest drop since 2018, losing 1.9% on the back of higher mortgage rates and stricter lending conditions. This softness is set to continue – the current round of monetary policy tightening is almost certainly not over, as inflation has been slow to ease.
The stock markets are taking a breather
The start of the year was very good for equity investors, with stock markets recovering much of the losses recorded in 2022, which turned out to be a tough year. But since early August, investors have once again fallen prey to doubt and anxiety. Is this bout of volatility just a brief consolidation or is it a sign of a much larger correction? We think it’s more likely to be the former. First, sell-offs at this time of year are perfectly normal – it’s widely known that there’s often a summer dip. Over the very long term, average monthly performances are often down in August and September, while the early summer and end of the year are often better times for equity investments. And second, investors were extremely bullish on the stock markets in late July, with confidence levels nearing the highs recorded at end-2021. A correction, or at least a consolidation, seemed unavoidable – and even welcome – to wipe out some of the excessive short-term optimism.
The slight market decline since the start of August has already erased much of the excess optimism. So it looks like the stock market correction is already well under way and will bottom out soon. We think it’s time to start getting ready to seize some of the opportunities that have arisen in recent weeks.
We’re keeping a close eye on the bond market, however, which could cause some trouble. Even though inflation is easing around the globe, bond yields have risen sharply since early August, probably due to the robust economic data coming out of most developed countries and the ongoing threat that central banks will continue to hike rates. With 10-year yields nearing recent highs in both North America and Europe, investors will be paying close attention to what the world’s main central bankers have to say when they meet in Jackson Hole for their annual gathering later this week. More specifically, we’ll be looking to see whether the current round of sharp monetary tightening will soon be coming to an end.
China – stimulus needed to boost confidence
Chinese stocks have partially erased the gains from the rally that followed the country’s reopening last November, with the recovery unexpectedly running out of steam. The three long years of lockdowns appear to have left scars on both investors and consumers.
The services sector has picked up sharply with the resumption of travel, but the rebound in consumer spending is not strong or broad enough to lift the entire Chinese economy.
In addition, investors’ appetite for property is low, and the balance sheets of some property developers were severely weakened by the pandemic and debt reduction measures. The sluggish uptick in consumer spending and the excessively slow recovery in the property sector – a major driver of the domestic economy – should spur Beijing into action.
We’ve recently seen signs of easing by Chinese policymakers, with two surprise rate cuts in the space of as many weeks. This could mean Beijing is finally getting ready to
introduce new stimulus measures. China’s economy does seem to be gradually recovering from the pandemic, but it will need a boost from more accommodative fiscal and monetary policies if consumer and investor confidence is to be restored – paving the way for a lasting rebound in the region’s stock markets.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
