Global equities edged lower last week, leaving markets down 2.5% in local currency terms and 1.9% in sterling terms from their highs at the end of July. Bonds also lost 0.5-1.0% over the week as yields headed higher again. 10-year US Treasury yields ended the week at 4.15%, cementing their recent move above 4%. As for UK Gilts, 10-year yields rose to 4.5% but remain a bit below their early July high.
Inflation, just for a change, was the main focus last week. But in the event, it was the Chinese rather than US numbers which drew the most comment. The July US inflation data saw no big surprises. The headline rate edged back up to 3.2% following a sharp decline in June, while the core rate slowed slightly to 4.7% from 4.8%. Over the month, core prices rose a moderate 0.2% for the second month running, supporting the thesis that inflation pressures have moderated considerably even if inflation is still some way from returning to the Fed’s 2% target.
The Chinese data, by contrast, sparked a wave of headlines proclaiming a slide into deflation, conjuring up worries that China may now be facing the deflationary scourge which has dogged Japan in recent decades. In reality, the numbers were rather less worrying. Pork prices were a big factor behind the 0.3% drop in consumer prices versus a year earlier and core inflation actually rose in July to 0.8% and remains in the 0.5-1% range of the past year.
However, worries over the weakness of the Chinese economy were also fuelled by news of continued declines in exports and imports and signs of renewed distress at China’s largest property developer. This downbeat news duly led to Chinese equities falling 3.5% and reversing some of their recent recovery.
While the strength of the post-covid economic rebound has undoubtedly disappointed, Chinese growth still looks set to be around 5% this year, compared with no more than 2% in the US and an anaemic 0.5-1% in the Eurozone and UK. Importantly, high youth unemployment and the absence of inflation mean the authorities should continue to introduce further piecemeal stimulus measures. There is currently no sign of a bazooka being launched, but then again no-one expected last year’s overnight U-turn in Covid policy.
We remain positive on Chinese equities as valuations are low and seem to be pricing in too gloomy an economic outlook. We also like emerging markets more generally. Valuations are cheap, particularly relative to the US, and interest rates look set to be cut sooner and faster than in the developed world.
Tech stocks are the other area which have fallen back just recently and have led this month’s decline in markets. Nvidia, the semiconductor stock and poster boy of the AI-related boom, is down 14% from its July high although remains up 180% year-to-date. High valuations, along with the continuing rise in bond yields which hits high growth stocks hardest, have both probably contributed to the retreat in the sector.
Here in the UK, the main focus – other than the return of the traditional wet British summer – was the second quarter GDP figures which surprised on the upside. GDP posted a 0.2% gain over the quarter, rather than flatlining as had been expected, to be up 0.7% on a year earlier. Rather surprisingly, given all the gloom and doom, consumer spending and business investment posted healthy gains last quarter.
The continuing unexpected resilience of the economy is encouraging, although much of the monetary tightening has yet to feed through and interest rates have still to peak. As in the US and Eurozone, the prospects for any further rate increases are very data dependent. The wage and inflation numbers out on Tuesday and Wednesday will be a big factor in whether markets stick to their current view that UK rates still have another 0.5% to rise.
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