• Central banks remain on their relentless march – pushing up interest rates in the battle against the persistence of consumer price inflation. This has already exposed cracks in the banking sector, and recent survey data goes from weak (service sector) to very weak (manufacturing sector) suggesting a slowing economic backdrop. In China, its economic reopening from COVID lockdowns is looking temperate at best, as consumers prefer to continue saving, not spending and the property market still looks fragile.
  • Inflation and interest rates remain high, but UK consumer confidence is steadily improving from the lows found in the wake of the short-lived Truss Prime Ministership. 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 impact the spending power in a rising number of households. US consumers have tended to spend down savings and rising interest rates tend not to be as impactful in terms of rising costs but will still pose problems for people looking to move home, as their long-term mortgage rates are not transferable to new properties.
  • 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 potential for the war in Ukraine.
  • Inflation remains Enemy Number 1. That central banks were too loose in keeping interest rates at their COVID ultra-low levels is now a given, and the reason why they continue to talk in hawkish tones about rate rises to come. In the US and Europe at least, they will be breathing a sigh of relief that the inflation genie is heading back to the lamp. The Bank of England has more work to do. Weaknesses remain in the banking system, for now this is a secondary concern, but has prompted commercial banks to tighten lending standards.
  • In fixed income markets, 2023 is proving harder work than anticipated. UK Government bond yields have risen (which means prices fall) but have typically fallen elsewhere. Credit spreads have been relatively stable. We continue to use several strategic bond funds, some of which have been slowly increasing interest rate sensitivity in portfolios, in anticipation of falling interest rates. 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.
  • The mood in equity markets remains wary of recession, but one in which investors have been happy to accept the positive returns year to date. The weakness of the UK market and the strength of sterling are negating much of these positive returns. Areas such as US equities have seen valuations move from ‘expensive’ to ‘average’ in recent years. Others, particularly the UK and Japan are looking cheap versus history, but require a catalyst to unlock that value. Pressure on corporate earnings and profits will grow as consumer spending pressures build.
  • Sterling strengthened against the major currencies since January, particularly so against the Japanese yen as new Governor Ueda stuck, for now, to yield curve control. Despite the Saudis promising production cuts, Brent Crude, which started the year just below $86/barrel, moved lower by the end of June to $70/barrel. The US Department of Energy has announced the purchase of 3m barrels following drawdowns from the Strategic Oil Reserve last year. Gold rose sharply towards $2000/oz as concerns rose about the banking sector, but drifted lower to close at c$1968/oz.

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