Investment Commentary – August 2023

2 minute read

Positive equity market momentum that began at the end of May has continued into July. Sentiment has been buoyed by falling inflation, stronger than expected economic growth and the artificial intelligence (AI) theme propelling the largest stocks. Furthermore, the most recent quarterly earnings updates painted a more positive picture on recent trading and the immediate outlook.

 

The biggest surprise in the month came from a greater than anticipated fall in UK inflation. The headline CPI figure came in at 7.9% against the expected 8.3%. Following a series of disappointments, this surprise was welcomed by markets. Although too much cannot be placed on a single data point, more rapidly falling inflation could allow the Bank of England to slow the pace of rate rises, and ultimately loosen monetary policy sooner than anticipated. Falling inflation was somewhat supported by slackening labour market conditions, although the market remains tight relative to longer run averages.

 

In the US, the Federal Reserve increased rates by 0.25%, in line with market pricing going into the meeting. In comments following the meeting Federal Reserve Chair Powell reiterated that economic growth was robust and the committee was still focussed on ensuring that inflation didn’t become entrenched. Although the headline inflation rate in the US has dropped to 3%, and is close to the 2% target, there are still concerns over a labour demand/supply imbalance and the rate of wage growth. With Powell suggesting that the 2% inflation target would not be sustainably reached until 2025.

 

Similarly, the Bank of Japan (BOJ) tightened policy, although in its own way. The Japanese central bank has been implementing monetary policy through controlling the yield on government bonds. At the end of the month, the BOJ announced that they were willing to see the yield on 10 year Japanese government bonds rise to 1%, rather than the previously stated 0.5%. This effectively means less quantitative easing and higher rates in the real economy. Tighter monetary policy overall. Japan was the only large developed market that was maintaining loose monetary policy and this change in direction could have meaningful implications over the coming months.

 

Finally, some concern was raised in the month on the withdrawal of Russia from the Ukraine grain deal, which was facilitating the export of grain by sea from Ukraine through the Black Sea. While there was some reaction in commodity markets from the announcement, it has not been as bad as feared. While the wheat price has reacted, rising 20%, prices remain over 30% lower than the peak seen last year. However, although the market is contained for the time being caution is needed. The removal of such a large amount of exports from the market make the potential for price spikes much more likely. This may have a particular impact on those regions historically reliant on grain imports, notably Africa and the Middle East. Furthermore, disruptive weather patterns have the potential to exacerbate the issue. Higher food commodity prices have the potential to drive inflation across the world, making this market one to be monitored.