• Central banks have stopped marching forward at least; signalled pauses in the relentless rise of policy rates and the tone of comments being released suggest, more probably, that a peak has now been reached. Cracks in the US banking sector look contained for now but concerns about the state of the US regional banks and their loans to the property sector is a potential future problem. Recent survey data, whether it be for services or manufacturing, continue to show a weakening economic picture.
  • We are firmly in a trend of disinflation. It is the differing pace of that slowing inflation picture that should be noted. US inflation peaked in June last year, in Europe and the UK it was last October, but it is the falling trend in inflation that is important. It isn’t all plain sailing; nominal wage growth is elevated, and rising oil prices present a challenge to the pace of inflation falling. In many countries, such as the US, China, Japan, South Korea, Spain, Portugal (amongst others), inflation is already less than 4%.
  • Given the importance of the consumer to developed economies, assessing the health of consumers helps to paint a picture of the health of the overall economy. There are some concerns. US consumers have spent down pandemic savings far more aggressively than their UK peers, student loan repayments are about to restart for over 40m Americans, rising financing costs work to constrain spending power. UK household savings ratios remain higher than immediately before the pandemic, but in the same way as rising energy bills sucked those accumulated pandemic savings away from any consumer spending boom, rising mortgage costs will slowly begin to impact the spending power in a rising number of households.
  • Unemployment remains low for now and a job-filled recession is likely to be a less fearful beast than recent recessions, during the financial crisis and the pandemic. There is a ‘but’, which is we’re less capable of absorbing the impact of further negative shocks and geopolitical risks remain, most obviously with the war in Ukraine.
  • In fixed income markets, corporate bonds have fared relatively better than government bonds to date. Credit spreads have tightened after widening during March following the emergence of stress in several US regional banks. We continue to position portfolios for an era of peaking interest rates and have been adding to fixed income. The yield available from fixed income, whether it be government or corporate bonds, should serve as a positive long-term backdrop for the asset class.
  • Equity markets are more sensitive to an economic slowdown, but contrary to that concern, many equity markets have made progress this year. The fly in the ointment for UK investors is the strength of sterling, which has negated much of these positive returns. Areas such as US equities still look ‘expensive’. Others, particularly the UK and Japan, are looking attractive versus history but require a catalyst to unlock that value. Pressure on corporate earnings and profits will grow as consumer spending pressures build.
  • Sterling remains stronger than the euro and the yen over 2023, however since the summer some relative weakness has hit the pound, particularly against the US dollar. There has also been some recovery in the weakness of the Japanese yen.
  • Saudi and Russian production cuts underpin the recent risk in the oil price. Brent Crude started the year just below $86/barrel, moved lower during June to $70/barrel, but finished September above $90. Gold rose sharply topping $2000/oz as concerns rose about the banking sector in March, but drifted lower to close September at c$1850/oz.
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