market #intelliGENce Jul 23

A detailed analysis of what's been moving markets over the last month

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In a nutshell

• UK inflation proves disappointingly stubborn

• Unexpected 0.5.% rate hike from Bank of England

• Apple hits $3 trillion market cap

What's moving markets

Inflation watch continues. It's the key data point every month, and the one with direct impact on people's lives. Until inflation is under control and a lot closer to target, this theme is set to stay. Any variation versus expectations, up or down, pushes interest rates and markets onto a new path.

May's UK headline CPI (released in June) was 8.7%, the same as the previous month and higher than the anticipated 8.4%. This helped the Bank of England (BoE) to decide on a 0.50% rise over 0.25%.

Higher interest rates mean higher mortgage rates, higher loan costs, and in the end, less money for people to spend on goods and services. Not a great situation, but it should help bring down what is known as Core CPI, the part of the inflation number that is demand-led so can be controlled.

However, the problem is that Core CPI is still going up, having risen from 6.8% to 7.1% - a sign that the BoE don't really have the situation under control.

Mortgage holders are feeling the brunt of the interest rate pain. The somewhat unexpected 0.50% rate hike has pushed both 2 year and 5 year average deals over 6%. This is starting to have an impact on house prices, reducing the number of new buyers in the market and the affordability for existing homeowners as they’re forced to refinance onto much higher rates.

Across the pond, the Federal Reserve are in a much more comfortable position. So much so, they felt it was time to take a pause in their rate hiking cycle. Granted, they went at a quicker pace than the BoE, but with both Headline and Core CPI falling in the US, they have time to consider their next move. An enviable position.

China is on a different monetary policy path. Unlike most developed nations who are concerned about rate rises, a number of lending rates there were cut through June. Their focus is on getting economic growth back on track following harsh lockdown restrictions. Q2 growth numbers will be out shortly and examined closely.

US equity market returns remain narrow, with big tech stocks leading the charge. This was emphasised further in June by Apple reaching a market capitalisation of $3trn. They are the first company in the world to reach this milestone, so a pretty historic moment.

To put it into perspective, Apple is now bigger than the entirety of the FTSE100 - that’s BP, Shell, HSBC, and 97 more massive companies combined!

Asset class implications

UK short term bond yields rose following the larger than expected BoE rate rise. The yield on a 2 year Gilt shot up by about a percent over the month, finishing around 5.25%. Interestingly, longer dated bonds didn’t move very much at all (the Gilts All Stock index return is roughly flat for June). This meant a further inversion in the yield curve (shorter bonds yielding higher than longer) which puts more weight behind the looming recession argument.

The bond market might think we are heading for recession, but it seems no one has told the equity market. All the main indices were up for the month, led by the US with the FTSE USA returning nearly 4%.

It feels as if the US market is overvalued, albeit a market can be overvalued and still do very well. The US is proving that, with a double digit return year to date.

Emerging Markets also posted a positive return in June. Poor Chinese equity performance has weighed heavily on the FTSE Emerging and FTSE Asia Pacific ex Japan markets of late. June will be a welcome relief, though at the halfway stage, both are still in negative territory for 2023.

There continues to be value in fallen fixed interest and pockets of risk in equity markets. These themes are likely to continue as we approach peak interest rates and push closer towards a recession. However, as 2023 has proven so far, that doesn’t mean risky assets can’t do well.

Source: FE Analytics, GBP total return (%) to last month end