MarketMinder Europe provides our perspective on current issues in financial markets, investing and economics. Our goal is to analyse key topics in an entertaining and easy to understand manner, helping you see the news of the day in a unique perspective.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
A week into summer and based on financial publications we cover, moods are warming toward a couple parts of the old Ottoman Empire: Turkey and Greece. These Emerging Markets have a limited global market presence, but every now and then, we think they can illustrate key investment lessons.[i] Here is a big one we think they show now: Monitor how expectations align with reality. According to our research, when the former outpaces the latter, disappointment tends to follow—a factor we think is worth keeping in mind given recent buzz surrounding political developments in Turkey and Greece.
A Turkish Delight for Investors?
After Turkish President Recep Tayyip Erdogan won last month’s general election, extending his 20-year reign by another 5 years, some financial commentators we follow argued Erdogan’s new appointments could prompt market-friendly economic policy changes. His naming internationally respected economist Mehmet Simsek and former US bank executive Hafize Gaye Erkan as finance minister and governor of the Central Bank of the Republic of Turkey (CBRT), respectively, stirred hope amongst some market analysts we track of a pivot to more traditional economic policies (and away from the unorthodox view—which Erdogan subscribed to—that high interest rates cause inflation).[ii] We noticed expectations were high leading up to the CBRT’s June meeting, and we read some analyst projections that the CBRT’s benchmark interest rate would double, triple or even quadruple in response to sky-high inflation (which clocked in at 39.6% y/y in May).[iii]
Did the Bank of England (BoE) just overreact to hot videogame sales? That is one potential interpretation publications we follow provided of Thursday’s half-point rate hike, which policymakers pinned on May’s surprise inflation reacceleration … which, in turn, analysts have determined derived in part from robust consumer demand for the new Legend of Zelda game lifting recreation and culture prices.[i] But instead BoE head Andrew Bailey once again blamed workers’ seeking higher wages and companies’ protecting profit margins for driving prices higher, fuelling commentators’ suggestions the UK’s inflationary pressures are somehow different and stronger than the rest of the world—and potentially necessitating rates to rise from today’s 5.0% to 6.0% or more by year end.[ii] With this comes talk of a mortgage squeeze compounding cost-of-living pressures, potentially ratcheting up recession risk.[iii] Yet for UK stocks, which flirted with correction territory this spring, none of this is surprising, new news, in our view.[iv] These factors have been discussed, debated and dissected in publications we read for months. Rather, our historical market analysis suggests to us this is a classic case of UK markets zagging on sentiment whilst global markets zig. In our experience, divergences like this usually don’t last for long, and with economic fundamentals globally looking pretty good, in our view, we think the stage seems set for UK stocks to rebound.
The popular view espoused by commentators we follow is that with the UK’s headline consumer price index including owner occupiers’ housing costs (CPI-H) accelerating from 7.8% y/y to 7.9%—and core inflation (which excludes food and energy prices) speeding to a fresh high of 6.5%—the BoE hasn’t yet put a lid on prices.[v] These observers further suggest that means more rate hikes are likely to come at a time gross domestic product (GDP, a government-produced measure of economic output) growth is mostly wobbling sideways, making recession a foregone conclusion as more mortgages come off their fixed-rate periods, exposing more and more borrowers to a sudden surge in monthly payments.[vi] They further pair higher housing costs with the too-slow march to lower energy prices and stealth tax hikes, suggesting there isn’t much left over for discretionary spending and investment.
That, at any rate, is the going narrative from observers. We think stocks might seem to reflect this, too, at least to an extent: The MSCI UK Investible Market Index (IMI) is down -5.4% from its last all-time high on 16 February.[vii]
Recently released US and Chinese retail sales and industrial production reports for May showed ongoing growth overall.[i] Now, these datasets don’t reflect most services activity, the bulk of their economies.[ii] They are also backward-looking—giving only an idea about economic conditions a month ago—not too relevant for markets, which we think are forward-looking. But from a sentiment perspective, in our view, the latest data provide further evidence undercutting the notion global demand is faltering, a popular narrative in financial commentary we have seen.
American Economic Activity Holding Up
US retail sales (which aren’t inflation-adjusted) rose 0.3% m/m in May—with broad-based growth across categories—on top of April’s 0.4%.[iii] That shattered expectations for a -0.2% decline.[iv] Notably, car purchases accelerated to 1.4% m/m, whilst petrol station sales tumbled -2.6% as fuel prices continued falling.[v]
After Eurostat revised down the eurozone’s Q1 gross domestic product (GDP, governments’ economic output measure) last Thursday, it appears the monetary union’s long-awaited recession (broad economic contraction) may have finally arrived—at least using one common definition.[i] But we don’t think this is investors’ cue to run for the hills. For stocks, it seems mostly like very old news, in our view.
After eurozone Q4 2022 GDP declined -0.1% q/q, recent downward Q1 2023 GDP revisions in Ireland, the Netherlands, Germany and Greece flipped the currency bloc’s Q1 growth from a 0.1% q/q initial growth estimate to a -0.1% contraction.[ii] Whilst many commentators we follow consider two back-to-back quarterly declines a recession, that doesn’t make it formal. The responsibility for declaring recession belongs to the eurozone’s official arbiter—the Centre for Economic Policy Research’s Euro Area Business Cycle Network (EABCN)—which hasn’t weighed in yet.[iii]
Like the US’s National Bureau of Economic Research (NBER) Business Cycle Dating Committee, EABCN’s committee considers broad criteria.[iv] Indeed, Q4 2022 and Q1 2023 GDPs’ -0.1% q/q downticks—the shallowest possible two-quarter drop—may not qualify, at least judging by EABCN’s latest pronouncement.[v] In March, they found: “real GDP growth in the fourth quarter of 2022 halted, but did not turn significantly negative, as a large drop in private consumption and investment was offset by a similarly large reduction in imports. The output growth pause contrasts with a continued robust expansion in employment, especially in the service sector.”[vi] Whether a second quarter of “output growth pause” constitutes recession or not is unclear—we will just have to wait for those fine folks to decide. Notably, US GDP endured a bigger contraction in Q1 and Q2 last year, and the NBER didn’t deem it one.[vii]
We don’t think there is a definite way to know a bull market—a prolonged rise in equity markets—is underway early in its life. That didn’t stop US financial commentary we follow from claiming America’s S&P 500 breaching 20% up from its 12 October low last week proved just that.[i] But, with that said, here is a pretty good sign a bull market is underway, in our view: When people move on from a big worry that accompanied the prior bear market (a prolonged, fundamentally driven broad equity market decline of -20% or worse) … but move on to another, similar issue that seems like the next shoe to drop.
So it went Tuesday, when the US Labor Department’s May Consumer Price Index (CPI, a government-produced index tracking prices of commonly consumed goods and services) report showed headline inflation slowing bigtime, from 4.9% y/y to 4.0%, whilst core CPI, which excludes food and energy, eased from 5.5% to 5.3%.[ii] Some commentators we follow acknowledged the improvement. But many publications buried the news under an allegedly alarming story about UK wage growth jumping 7.2% y/y in the three months through April, sending long-term UK Gilt yields above their autumn 2022 highs. The argument: Rising wages will force companies to hike prices, which in turn brings higher wage demands from workers, creating a wage-price spiral the Bank of England (BoE) must ratchet rates far higher to counter, adding a more lasting force to earlier inflation pressures from energy and other goods prices.[iii] But in our view, the US’s recent experience also shows why the UK edition doesn’t add up, likely rendering this another brick in what we increasingly think is a young bull market’s wall of worry.
Since peaking at 9.1% y/y in June 2022, US headline CPI has more than halved.[iv] We think a lot of this has to do with energy costs’ substantial easing, but the core inflation rate has also improved notably—from 6.6% y/y last September to 5.3%.[v] When you also exclude shelter—which we think is logical, considering the majority of that component is the (in our view) imaginary owner’s equivalent rent line item (or the amount homeowners would pay to rent their own house)—we get all the way down from 6.7% y/y last September to 3.4% in June.[vi] That is quite close to the long-term average inflation rate, and it might be a sign inflationary forces have moderated substantially outside categories with big commodity exposure and supply quirks. And in our view, it is very, very positive news for markets. We don’t think inflation is a market driver, but in our experience, this was a big worry for investors and people just trying to make ends meet. Relief is usually a good thing.
Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no party nor any politician and assess developments for their potential economic and market impact only.
Amidst chatter in the UK about food price controls and animated discussion amongst America’s Congress regarding the country’s statutory debt limit, political stories have dominated headlines in financial publications we cover. However, we noticed a couple of political developments in Europe we thought were going overlooked. Spaniards will head to the polls early—in July versus December—whilst Greeks will go to voting booths again in a couple weeks despite May’s election returning a clear winner. We see some interesting takeaways for investors in both. Read on!
Nobody Expects Spanish Gridlock
What happens when two monetary policy institutions pause rate hikes, say some things alluding to easing their fight against inflation, then U-turn and hike rates? Evidently, what happens is financial commentators keep parsing their statements for clues as to what will happen next, as if policymakers didn’t just demonstrate what we think was the fruitlessness of this endeavour. So it goes this week, with many commentators we read trying to project what the Reserve Bank of Australia (RBA) and Bank of Canada (BoC) will do next after the week’s hikes. Dear readers, we suggest you not fall into the same trap—if monetary policymakers can’t predict their own moves, how can mere mortals?
To see this, let us start with the RBA and simply take a tour of its recent policy decisions and statements. In February, as the bank hiked its policy rate by 0.25 percentage point (ppt) or 25 basis points (bps), Governor Philip Lowe’s statement said the bank’s “Board expects that further increases in interest rates will be needed over the months ahead.”[i] So none of the commentators we follow appeared too surprised when the RBA hiked again in March—or that Lowe’s March statement said the “Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary.”[ii] But then the RBA paused in April, surprising many observers we follow. That month’s statement referred several times to slowing economic growth, falling inflation forecasts and monetary policy’s tendency to hit the economy at a lag. The forward guidance—a fancy term for what monetary policymakers say they anticipate doing—also got more dovish (or non-rate-hikey, if you aren’t into overused bird metaphors), saying more rate hikes “may well be needed.”[iii] Not “will,” just “may well.” Many analysts we follow said this likely meant rate hikes were off the table for the time being.
Surprise! The RBA hiked by 0.25 ppt in May, defying many commentators’ forecasts for more pausing.[iv] What changed? Governor Lowe’s statement explained that after assessing rate hikes’ impact, the Board decided it would take too long to get inflation back down to target if they didn’t resume hiking. Yet their guidance was still what we would describe as squishy, saying more rate hikes “may be required.”[v] Evidently that was indeed the case, as they hiked another 0.25 ppt Tuesday despite a raft of slowing economic indicators.[vi] And they have kept the “may be required” guidance, spurring many observers we follow into another round of what will they do next?[vii]
How are consumers faring after two years of elevated inflation?[i] Financial publications we follow suggest households are struggling amidst higher prices, which we think is understandable—and we don’t dismiss those hardships and challenges. But as we showed last week, price pressures haven’t derailed American consumer spending. How about consumers in other major economies? A look at global retail sales measures isn’t clean, as many distortions from prices and calculation limitations muddy the water. But the data are overall mixed—a sign consumer activity looks more resilient than commentators we follow who anticipate recession (an economy-wide decline in activity and output) may realise, in our view.
First, note that many retail sales metrics aren’t inflation-adjusted. Those that are—volume measures—take into account price changes, but for those that aren’t, we think it is important to keep inflation trends in those nations front of mind, as we will show.
Starting with places that report sales volumes, April’s numbers brought some encouragement, in our view. In the UK, retail sales rose 0.5% m/m, rebounding from March’s -1.2% dip.[ii] April’s read beat economists’ consensus estimates and reflected some pent-up demand from March, when historically wet weather kept shoppers home.[iii] Hence, non-food stores sales volumes rose 1.0% m/m after March’s -1.8% fall.[iv]
Is China’s economic recovery going into reverse? After April’s monthly indicators showed slower-than-expected growth, May’s official Purchasing Managers’ Indexes (PMIs, monthly surveys that track the breadth of economic activity) inspired more pessimism amongst financial commentators we follow. In the month, manufacturing’s contraction deepened from 49.2 to 48.8 and services slowed from 55.1 to 53.8 (readings over 50 indicate expansion, below 50, contraction).[i] In turn, headlines in publications we cover questioned China’s post-pandemic reopening bounce, arguing the expected boost is fizzling. But in our view, China is following a pretty normal reopening course: returning to long-term trends after an initial, short-lived boom, with the boom getting smaller in each cycle of lockdown to reopening. Perhaps some investors’ projections were too high entering this spring, but with pessimism quickly returning now, we think a slow-growing China will likely be fine for stocks.
In our view, most of Wednesday’s PMI commentary lacked meaningful long-term context. The articles we read looked back, but only to 2020, comparing now to the rebound from the first wave of lockdowns.[ii] Then, manufacturing stayed positive for over a year before slipping back into contraction as the autumn 2021 COVID wave prompted fresh restrictions.[iii] When the rebound from that and successive waves waned, commentators we follow blamed the COVID recurrences in Shanghai and other major metro areas—seemingly setting expectations for a lasting boom now that China has abandoned Zero-COVID.[iv]
That expectation has long seemed a bit off base to us, as our research suggests it differs from the developed world’s experience. In the US, UK and eurozone, the first reopening brought the biggest boom simply because it followed the most draconian lockdown—and when society hadn’t learned how to live with restrictions and keep them from hampering commerce as severely.[v] That is key context, in our view. When restrictions returned later in 2020 and 2021, activity didn’t fall as much as in February and March 2020, so we don’t think there was as much ground to regain when things reopened.[vi] Accordingly, the subsequent rebounds were smaller and shorter, with longer-term trends reasserting themselves swiftly.[vii]
Faced with better-than-expected April US consumer spending growth in a widely watched Bureau of Economic Analysis (BEA) report released Friday, coverage we read gravitated to storm clouds supposedly gathering.[i] Their focus, which we don’t think is particularly surprising: inflation and how it has challenged many households’ finances over the last year and a half. Overall and on average, America’s consumer spending has held up despite price pressures, suggesting to some commentators we follow that US consumers must be heaping on debt, setting up trouble later. But a look at US spending, income and household finance data argues otherwise, in our view. For investors, we think the negative attitude toward fine data underscores the prevailing pessimism of disbelief, which fosters young bull markets (prolonged, broad stock market appreciation).
Following a slight -0.2% m/m February dip and flat March, inflation-adjusted or real personal consumption expenditures (PCE, the broadest measure of US consumer spending and 71% of gross domestic product, GDP) rose 0.5% in April, adding to evidence the economy is off to a good start in Q2.[ii] (Exhibit 1) We found Americans’ consumer spending was strong across the board. Services (62% of PCE) not only accelerated to 0.3% m/m growth, but goods expenditures jumped 0.8% after detracting for two months.[iii] Whilst backward looking, broad-based expansion in US GDP’s largest segment suggests to us recession (an economy-wide decline in activity and output) was likely not at hand in early Q2.
Exhibit 1: US PCE Continues Expanding
Source: US Federal Reserve Bank of St. Louis, as of 26/5/2023. PCE goods and services, January 2002 – April 2023.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
This article reflects the opinions, viewpoints and commentary of Fisher Investments MarketMinder editorial staff, which is subject to change at any time without notice. Market Information is provided for illustrative and informational purposes only. Nothing in this article constitutes investment advice or any recommendation to buy or sell any particular security or that a particular transaction or investment strategy is suitable for any specific person.
Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
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