Financial Bulletin – July 2024

Key Takeaways:

Equity markets generally rose during the month as evidence of fading inflation meant investors became more confident that the US Federal Reserve will embark on a period of lower interest rates.     

However, the world’s largest economy is definitely slowing down and the chances of a ‘soft landing’ whereby inflation returns to target without triggering a recession might be receding.

In the UK CPI fell to 2% over the year to May meaning inflation is now back at the Bank of England’s official target. This was not enough, however, to persuade enough members of the voting committee to back a rate cut. Several commentators viewed this decision as an attempt to remain neutral during the Election campaign.   

Political risk was a common theme during July as several events had a significant impact on markets.

In India Narendra Modi failed to secure an overall majority causing a significant fall in the Indian stock market as his business and economic reforms were put in jeopardy.

Meanwhile in France the prospects of a deeply divided Parliament as well as a resurgent far-right and far-left resulted in a sell-off of the French stock market.    

Over the last 6 months, the FTSE 100 returned 8.03%, the S&P 500 returned 14.73%, whilst the Euro Stoxx 50 returned 10.61%.

The Japanese Nikkei 225 returned 18.02% over the same period.

The broad emerging markets index returned 7.58% in US$ terms.

US 10 year government bond yields ended the month broadly flat, whilst gold prices fell slightly and oil prices rose around 7%.  

  • Chart of the month –

After peaking at over 11% UK inflation is back to target (for now):

Economic Review

There was more clarity on the direction of US inflation this month as further evidence that inflationary pressure is dissipating came to light. The headline rate fell to 3.3% in the year to May and has now fallen for two months in a row. In fact if you exclude housing costs then core services inflation was actually zero during the month.     

That said the US economy is certainly slowing compared to last year. Retail sales growth has now been falling for two months in a row and the effects of higher interest rates are starting to be seen in indicators such as credit card delinquencies.    

The news was more unequivocally good for the UK where inflation fell back to the official target of 2% and growth in the first quarter of the year was revised up to 0.7%. Whilst the Bank of England expects that inflation will creep up over the second half of the year the odds of an interest rate cut in August are now seen as high.

Also of note was that the unemployment rate rose for the fourth month in a row, indicating that higher interest rates are slowly but surely taking the heat out of the labour market.

Whilst the BoE decided to wait one more month before making the decision the European Central Bank became the first of the major Central Banks to cut interest rates as it lowered its key rate by 0.25%. Although inflation actually rose during the month the Bank expects it to remain fairly subdued and is evidently confident enough to begin cutting rates. 

Further afield the Japanese economy continued to give the Bank of Japan a headache. An extremely weak Yen and rising inflation expectations should pave the way for another rate hike but recent growth numbers have been weak and businesses are becoming less confident.    

Whilst the Chinese manufacturing sector expanded for the eighth month in a row the level of overcapacity and debt in the economy, particularly the property sector, remained the main cause for concern. Second-hand home prices registered their 26th successive monthly fall during June.     

Financial Markets and Corporate News

The greater prospect of rate cuts this year was enough to ensure another positive month for US equities, whilst European and UK equities had a negative month.

Nvidia briefly became the most valuable company in the world before falling back. Nevertheless Nvidia has accounted for around one third of the S&P 500’s return in 2024.     

Over the last 6 months, the FTSE 100 returned 8.03%, the S&P 500 returned 14.73%, whilst the Euro Stoxx 50 returned 10.61%.

The Japanese Nikkei 225 returned 18.02% over the same period.

The broad emerging markets index returned 7.58% in US$ terms.

The US 10 year Treasury yield ended the month broadly flat.

The Investment Association (IA) UK Gilts sector returned -2.90% over 6 months, whilst the IA Sterling Corporate Bond sector returned 0.23% and the IA Sterling High Yield sector returned 3.45%.

Looking Ahead

The ideal scenario for investors would be that major economies slow enough to gradually bring inflation back to target, allowing Central Banks to cut rates whilst growth remains robust enough that company earnings continue to grow. This is known as a ‘soft landing.’   

The worry for investors is that inflation can only return to target with a substantial weakening of the economy, which would lead to lower company earnings.   

Developments during June suggest this trade-off is finely balanced with personal finances now beginning to look stretched from an extended period of higher interest rates.

There remains quite a stark valuation difference between US large cap companies on the one hand and Emerging Markets and the UK on the other. For US companies to justify this higher premium they must keep meeting earnings expectations.

With inflation in the UK now back to 2% (though expected to edge up slightly over the coming months) all eyes are on the BoE and how long they will leave it before embarking on a cutting cycle. In real terms the Base Rate is now considerably higher than the average of the last 20 years, leading some economists to voice concerns about maintaining higher rates for too long.        

Finally, geopolitics cannot be excluded from an outlook for the rest of the year. The plight of Narendra Modi in India highlights that, in many emerging markets, the success of the stock market is tied to a specific leader or government. 

Whilst it is now thought that the far right is unlikely to gain an overall majority in France it is not out of the question and the risk of this eventuality will weigh on the stock market. Even if Marine Le Pen’s Party falls short of an overall majority a bitterly divided Parliament is unlikely to be a good backdrop for the French economy. 

Meanwhile the prospect of a Trump Presidency brings with it a heightened possibility of retaliatory tariffs and trade wars with China. The former President has promised a blanket 60% tariff on all Chinese made goods.