WHAT'S HAPPENING IN THE US?
Inflation has been hotter than expected again recently – the US Consumer Price Index leapt to 9.1% in June from 8.6% in May. The jump left the US Federal Reserve with no choice but to raise interest rates by 0.75% for the second month running.
But high inflation and rising rates actually aren’t the most important thing on investors’ minds any more. With many leading economic indicators falling - including our own in-house ones – investors are shifting their attention towards the risk of a recession.
And with financial markets relatively unfazed by the higher inflation and interest rate numbers, they rebounded from June lows. The MSCI All Countries World Index returned 7.1 % in July (local currency, income reinvested), versus -7.4% the previous month.
So why the change? Markets are forward-looking, with asset prices reflecting what investors think could happen many months ahead. And with the probability of a recession rising, markets have started to speculate about what central banks might do to save their economies. For example, they started to discount the expectation that US interest rates could be cut in the first quarter of 2023, which could be very positive for rising equities and bond prices.
Do remember that the value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.
RECESSION, BUT NOT AS WE KNOW IT
July saw the rollout of many corporate earnings announcements for the second quarter of the year. Expectations were low running into this period but the results have been fairly decent – certainly not the disappointment some had predicted. Several ‘growth’ companies – like technology firms which make up a large part of the US market – announced a solid quarter. Nevertheless, forward looking company comments were on the cautious side, and the overall trend for future earnings keeps being adjusted lower.
In contrast to the Q2 earnings season, the first estimate of US GDP for the same period – issued by the Bureau of Economic Analysis – has it declining at an annual rate of 0.9%. This follows a GDP fall of 1.6% in the first three months of the year. That means two consecutive quarters of decline which, by definition, means a technical recession.
But that’s probably not a fair summary of the US economy in the last six months.
No doubt growth had been slowing in the first half of the year, but the US is not in a downward spiral of falling output activity, employment, income and sales – which would normally be typical of a recession. On average, about 450,000 jobs were created in the US each month over the first six months of 2022, according to the US Bureau of Labor Statistics.
However, rising inflation is impacting consumers’ purchasing power and companies’ profit outlooks. Our own economic indicators fell further in July, pointing out the rising vulnerability of economies over the next 12 months.