Market Overview 16.08.2022

Last week provided the strongest signal yet that US inflation has peaked. Stock markets warmly welcomed the development with the MSCI All Country World Index gaining 2.9% on the week, although fixed interest markets were little changed overall.

For July, the month-on-month US Consumer Price Index (CPI) reading came in flat at 0% – the first time since October 2020 that this metric has not shown an increase. Following a +1.3% reading in June, the figure represented one of the largest monthly declines in CPI on record, driven by sizable drops in energy and gasoline prices. While the core equivalent showed a 0.3% rise, both data points came in lower than expected. The annualised figures remain elevated, with the headline at 8.5% and the core at 5.9%, but investors reacted positively to the release, viewing it as supporting the notion that inflation may have peaked.

Despite the good news, there is little to suggest that the Federal Reserve will deviate from its hiking path, with comments from several officials following the release reiterating the central bank’s stance that it will continue raising rates to rein in inflation. Rather than providing a cause for a pause, the positive data has opened up a debate as to whether the Fed will raise by 0.50% at its next policy meeting, as opposed to delivering another 0.75% hike. The US 10-year Treasury yield ended the week unchanged at 2.83% and the keenly watched two-year/10-year segment remained inverted – a commonly cited sign of an impending recession.

All sectors advanced in US large-cap benchmarks, with energy leading the way higher. Brent Crude, the international oil benchmark, ended the week up by around 4% but still remains below the US$100/barrel mark. The majority of US corporates have now reported second quarter earnings and overall, the results have been pretty good. Compared to previous earnings seasons there has been a notable shift whereby strong results have been rewarded by a clear positive market reaction – previously it was seemingly presumed that firms would top estimates and therefore that in itself was not enough to spark a rally. The broader index has continued its recovery from its June lows and has now recouped more than half of the year-to-date declines. Furthermore, the 10% decline of the pound against the dollar has cushioned UK-based investors against much of the decline in the US market so far in 2022.

UK growth data not as bad as feared

The UK economy contracted less than forecast in June, with the month-on-month GDP figure showing a 0.6% decline, versus an expected 1.3% drop. The pessimistic forecast was partly attributed to public holidays around the platinum jubilee celebrations for Queen Elizabeth II, and although the data was better than expected, it did not prevent a contraction of 0.1% for the second quarter. Unlike the US, the figure did not signal a technical recession, due to 0.8% GDP growth in Q1, but the Bank of England still expect a recession later in the year, with UK inflation seen continuing its march higher.

UK large-cap benchmarks underperformed on the week, adding 1.2% and the pound was little changed against the US dollar, remaining around US$1.21. In the bond market, UK gilts underperformed, especially at the long end, on concerns regarding the policy pronouncements of Liz Truss, the strong favourite to be next prime minister. The 10-year gilt yield rose by six basis points on the week to end at 2.11%.

There was a small rise in the German 10-year bund which ended the week at 0.99%, up by four basis points. European equities mainly advanced, with bloc-wide benchmarks higher by approximately 1.4% on the week. The euro edged higher against the US dollar, gaining roughly 1% to end at US$1.03.

This is a marketing communication and is not independent investment research. Financial Instruments referred to are not subject to a prohibition on dealing ahead of the dissemination marketing communications. Any reference to any securities or instruments is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned in it.