Gilts rally as markets consider the impact of an economic slowdown

This week saw further volatility in bond markets. August has been a very poor month for government bonds as yields in the UK and US have increased on fears that rates may go higher and remain elevated for longer. This week gilts caught a break as the bad news is good news scenario returned. The Purchasing Managers’ Indices for August show a much bigger slowdown in activity than had been forecast. The decline in services was particularly surprising given recent demand-driven inflation in many services sectors. These indices are usually much faster than official data in spotting changing trends and the PMIs show the UK and EU in contraction, and only modest growth in the US.

This allowed gilts to recover slightly as markets look at the already weak level of growth in the UK and figure it won’t take much to turn the Bank of England away from its higher-for-longer position. As ever, we should try to avoid reading too much into one month’s data, but the decline in house buyers, poor consumer confidence, and rising defaults and insolvencies also show further weakness for the UK.

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• GLOBAL: Bonds rally after unexpected drop in economic output
• US: Nvidia’s bumper sales drag US stocks higher
• EQUITIES: House builders slide as mortgage costs put off buyers

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

 

Government bond yields rise as concerns over sticky inflation return

This week has been a busy one for UK economic data. The headline figures clearly follow recent trends with wages rising rapidly, unemployment near historic lows and inflation falling. But below the headlines the picture is more complicated. Exclude food and fuel and inflation hasn’t budged. The cost of services, particularly travel and leisure, is still rising fast and the decline in oil and gas prices from last year’s highs will not last much longer and this will be concerning for the Bank of England. Markets have not been slow to notice and the potential for a 0.5% hike in September caused gilt yields to rise. The US Fed has indicated it also remains concerned about inflation and bonds yields have risen in the US.

Meanwhile, strong wage growth in the UK needs to be set against declining retail sales. The cold and wet July means we shouldn’t read too much into one month’s data, but the last two years have seen a clear drop in sales volumes as the value of sales has risen. Put simply, people are buying less as prices rise. While some companies have protected profits by raising prices this means revenues will have declined at others. 

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• UK: Gilt yields climb as inflation data underwhelms
• CHINA: Equities fall due to weak growth and property concerns
• EQUITIES: Insurers look for the positive in higher gilt yields

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

 

Inflation remains in the spotlight as economies tick over

This week there was a modicum of good news; inflation in the US continued to abate with the fabled “soft landing” of the US economy still possible, despite a slight uptick in unemployment claims. In the UK surprisingly robust growth figures caught out most people, with the data not reflecting either the market consensus or general mood of the country. It is baffling that a large increase in interest rates, a huge squeeze on the consumer as bills eat into disposable income and high energy and input prices aren’t having the effect expected. There could be some underlying growth factor no one has noticed, or the negative impacts of the last year are just taking longer to manifest.

Elsewhere inflation continues to be the dominant theme, with persistent deflation being a real possibility in China while in parts of Europe it has fallen below target and the falling cost of housing likely to continue to put downward pressure on inflation in the US. Despite this a rise in energy prices, with both oil and gas increasing significantly in the last few weeks, could mean the inflationary beast has a bit of fight left in yet.

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• CHINA: Demand slumps as Biden strains relationship further
• US: Headline inflation rises to 3.2%
• EQUITIES: Tight financial conditions challenge WeWork

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

 

UK Housing: residential prices falling at fastest rate since 2008

UK house prices are falling at the fastest rate since the financial crisis. According to the latest update from Nationwide building society, property prices fell by 3.8% over the 12 months to the end July as higher mortgage borrowing costs deter some buyers. The cost of the average 2-year fixed mortgage has increased from 2.8% at the end of July 2022 to 6.85% this week, although several lenders have reduced rates slightly in the last few days.

Higher borrowing costs are contributing to a slowdown in house building but are not putting off buyers entirely. Builders merchant Travis Perkins said profits are down 31% as the number of homes under construction has dropped from 52,000 in the second quarter of 2022 to less than 38,000 in the first quarter of this year. Meanwhile, builder Taylor Wimpey reported sales below last year’s level but said there is strong underlying interest as buyers are taking on longer fixed-rate mortgages to deal with higher costs.

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• US: Downgrade leaves markets unmoved but investors remain concerned about the outlook
• UK: Bank of England opts for smaller hike
• US: Bond markets unmoved by rating agency downgrade

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)