August inflation figures will be published in the US this week. Total inflation is expected to be up on the previous month due to energy price volatility, while core inflation, the US Federal Reserve’s preferred indicator, should continue to gradually return to more normal levels. This could mean that monetary policy will remain unchanged for the time being.
The governor of the Bank of Japan –the last major central bank to normalise its monetary policy – hinted over the weekend that negative interest rates might come to an end before the year is over. The yen gained further ground on the news, rising by more than 1% against the US dollar. The yield on 10-year bonds jumped above 0.70% and banking stocks recorded their biggest rise since December 2022.
In Germany, new orders rose sharply in June, boosted by a major aerospace contract, but then plummeted by 11.7% month on month in July. That decline, which was much larger than consensus forecasts, was compounded by disappointing industrial output, which was down 0.8% on the previous month. It will be hard for Germany to avoid recession this year, especially if the Chinese economy struggles to pick up.
Greenback buoyed by resilient US economy
The ISM services PMI for August came in well above economists’ expectations. The index, which is based on a survey of purchasing managers at large corporates, is a good indicator of how businesses are faring in the services sector. The survey covers a range of criteria, including orderbooks, employment and changes in cost and selling prices. It’s often used as a leading indicator of future business trends in the services industry, and it’s been remarkably resilient since the start of the year. In August, it rose to 54.5, which puts it well above the 50 mark that separates expansion from contraction. This is good news for the health of the US economy, given the key role that consumer spending – particularly on services – plays in driving gross domestic product (GDP). Almost two thirds of US GDP come from household spending. This shows that, even though inflation is high and interest rates are rising, US consumers are not cutting back on their spending. One explanation for this is that the jobs market is buoyant. Unemployment is close to its all-time low and wages are on the rise, both factors that underpin consumer confidence. But this resilience among consumers is probably not to the Fed’s liking. It’s likely to discourage it from cutting interest rates in the near future, as that could fuel a further rise in consumer spending.
The resilience of the US economy at a time when output is stalling in Europe explains why the dollar has gained ground against the euro and – to a lesser extent – the Swiss franc since July. But will the greenback be able to maintain this rally? In the longer term, the US’s growing current account deficit will probably keep the dollar in check. It’s now more difficult to attract capital to the US, since the interest rate differential with its European trading partners has narrowed significantly in recent months. What’s more, the words and actions of the European Central Bank and the Swiss National Bank over the next two weeks could further reduce the dollar’s appeal.
A cloudy summer for the solar energy sector
While temperatures have soared this summer – said to have been the hottest on record – solar energy shares have been treated coolly. An array of macroeconomic uncertainties – including the high costs of funding solar facilities due to rapidly rising interest rates, and falling prices for raw materials such as polysilicon – has cast a shadow over the sector. On top of that, there are geopolitical risks and hefty protectionist subsidies, all of which have knocked the sector out of favour.
But looking beyond these fleeting clouds, the sector’s future looks bright. Governments around the world have reaffirmed their commitments to becoming carbon neutral, and the race to a low-carbon economy is a matter of when, not if. Solar energy is still essential to achieving these objectives.
What’s more, the rise in oil prices in recent weeks makes this alternative renewable energy source all the more attractive. And let’s not forget the geopolitical considerations: the war in Ukraine has further boosted solar power’s appeal by underscoring just how urgent and strategically important it is for countries to achieve energy independence.
Although the solar sector has faced considerable challenges recently, the fundamentals that make it attractive haven’t changed. And solar is still a key component of the sustainable energy mix. For investors prepared to take a long-term view, the current fog could be a good time to think about entering this fast-growing sector.
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.
