World equities and UK corporate bonds made healthy gains in July, while stock markets in Asia topped the performance tables thanks to strong gains from Chinese shares.
Market moves that mattered
Welcome news for UK
The UK’s inflation rate fell by far more than expected to 7.9% in June. However, core inflation, which strips out food and energy and is closely monitored by the Bank of England (BoE), remains sticky at 6.9% after hitting a 30-year high of 7.1% in May. The Bank’s Monetary Policy Committee did not meet in July, but governor Andrew Bailey rejected the idea of raising the UK’s inflation target, currently set at 2%.
UK house prices experienced their largest annual fall since 2011, according to Halifax, as mortgage rates continue to rise. Wage growth was high at 7.3% in the three months to May compared to a year earlier, putting further pressure on the BoE to raise interest rates. Some potentially better inflation news came from the job market after unemployment nudged up to 4% and payroll numbers fell in June, suggesting wage pressures could start to ease. UK job vacancies also continued their gentle descent in June and could soon fall below one million once again.
UK monthly economic growth fell only marginally in May after the hit to activity from a trio of bank holidays, including the King’s coronation. Early data for July suggested both the service sector and the manufacturing industry had slowed further, raising some concerns about the health of the economy.
US hikes rates
After pausing in June, the US Federal Reserve (Fed) raised rates by a quarter percentage point to a range of 5.25% to 5.5%, the highest in 22 years. The good news is that US inflation has dropped to its slowest pace in two years at 3% and US GDP growth was stronger than expected in the second quarter at 2.4% in the face of the Fed’s aggressive policies.
However, US manufacturing struggled in June and early data for July suggested that service sector strength was fading too. The US job market showed fresh signs of resilience with companies adding jobs as layoffs slowed*. There was a boost for workers with wage growth a little stronger than expected at 4.4% for June. US Treasury Secretary Janet Yellen said a slowing China could spill over into the US, but she did not expect a US recession.
China promises to boost economy
China’s leaders have promised more support to bolster the economy, which has been losing stream in recent months. After an initial burst after lockdown restrictions were lifted, China’s economy has struggled. Chinese economic growth slowed from 2.2% in the first quarter to just 0.8% in the second, while imports and exports have both been disappointing. PMI data from China relating to June suggested the service sector strength was evaporating, while manufacturing growth remains sluggish. Chinese inflation was reported as zero for June, with producer prices falling more than 5% compared to the previous year.
Euro area slips into recession
The region fell into recession in the first quarter of 2023 after GDP was revised downwards to -0.1%. With inflation still high, the European Central Bank (ECB) decided to raise interest rates by an additional 0.25 percentage points in June. Inflation fell to 5.5% in June, but core inflation ticked up higher to 5.4%.
The Bank of Japan changes course
Japan finally started to tighten monetary conditions after its central bank relaxing yield curve controls – effectively allowing longer-term interest rates to drift upwards, in response to higher inflation. The country’s headline inflation rate came in at 3.3% in June, up from May’s figure of 3.2%. The Japanese yen briefly strengthened following the Bank of Japan’s announcement.
Investment highlights
A solid month for investors
July proved to be a better month for investors, despite a tough opening week. World equities and UK corporate bonds gained more than 2%, while most UK government bond returns were slightly positive too. Stock markets in Asia topped the performance tables thanks to strong gains from Chinese shares.
Markets paused for breath towards the end of July as we approached a heavy period for corporate announcements. Reported results for the second quarter will give valuable insight into key areas such as company profits margins and further clues regarding the outlook for corporate profitability. Strategically, we continue to diversify our equity portfolios and any volatility created during results seasons can present us with opportunities to invest more overseas, at more attractive prices, in anticipation of generating stronger longer-term returns for our customers
Property opportunities
Fixed rate mortgages delay the impact of higher mortgage rates, but economists suggest higher monthly repayments are now starting to take a more meaningful bite out of disposable incomes, which points to the potential for an economic slowdown or recession. As higher financing costs bite, we are seeing attractive opportunities in UK commercial property and are actively pursuing a number of acquisitions. We also continue to buy UK government bonds for our funds as the returns available look increasingly attractive as inflation starts to finally cool.
Please remember the value of investments and any income can go down as well as up and you may get back less than you invest.
* US Bureau of Labour Statistics