Weekly View - To pivot or not to pivot

The Fed delivered a second consecutive 75 basis-point interest rate hike last week, as expected. However, Fed chairman Powell assured markets that he is not on autopilot, indicating that the central bank will focus on future economic data and could slow its pace of rate rises in coming meetings. Markets took this as a policy pivot and rallied such that July was the best month for the S&P500 since November 2020. We are neutral US duration and US equities. The US inflation outlook remains uncertain however, given June core consumer prices (PCE) remained strong on the back of solid consumption and higher housing prices. Private sector wages rose by 6.5% on an annualised basis in Q2, leading 5yr5yr inflation expectations to jump significantly. Real rates came down as bonds rallied. While US GDP contracted for the second consecutive quarter in Q2, Powell pointed to the strong labour market to counter talk of a recession. August nonfarm payroll numbers this Friday will be important to watch for wage growth trends in the US. Meanwhile, Congress looks set to accept Senator Joe Manchin’s proposed USD433 bn spending package. The plan, coined the “inflation reduction act” will lower healthcare costs and raise investment in renewables, funded by a minimum 15% tax rate for big corporations, supporting our Green Marshall Plan theme.

Euro area growth of 0.7% in Q2 (quarter on quarter) was better than expected. But inflation remains stubbornly high at an annual 8.9%, particularly driven by energy prices. Russia’s reduction in Nord Stream’s gas flows to a mere 20% of capacity pushed European gas prices higher and prompted EU countries to agree to a voluntarily 15% reduction in gas consumption, although enforcement remains in question. Elsewhere, China is now attempting to alleviate its property crisis by creating a fund to encourage the completion of unfinished apartments and end mortgage-payment boycotts. The fund’s size is insufficient to fully resolve the property developers’ funding crisis, however. Meanwhile, presidents Biden and Xi discussed Taiwan in a telephone call and committed to a future in-person meeting. In Chinese markets, tech giant Alibaba is seeking a dual primary listing in Hong Kong, which the company hopes will allow it to keep its New York listing. This week, the main risk event will be Nancy Pelosi’s reported visit to Taiwan.

Finally, Q2 2022 earnings results showed some positive surprises at the sales level and resilient margins as consumer staples companies rush to raise prices despite fears of increased consumer resistance. Earnings per share on the S&P 500 are up 5.8% so far but top line growth is +13%, in line with our forecasts. There has been a wide range of outcomes in a stock picker’s market, with Walmart and Meta missing expectations, but Apple and Amazon faring better. Some key oil majors published their highest profits ever ahead of what will be a closely watched OPEC meeting.