Weekly View, 08 August 2022

Last week’s main event for markets came from robust job creation numbers in the US, with half a million jobs created last month, well above market forecasts. Most of the new jobs were in the services sector, which has benefitted from economic reopening as covid restrictions have lifted. Average hourly earnings rose by an annual 5.2% and unemployment reached its lowest level since 1969 at 3.5%. Based on these developments, we do not expect a pivot in the Federal Reserve’s monetary policy, with markets now pricing in a 75-basis-point (bp) interest rate rise when the Fed meets in September. Despite its two consecutive quarters of negative economic growth, the US economy is clearly not in recession, even if investor fears of one drove the biggest flows into bonds since Nov 2021. We believe that while a recession is inevitable, it is not imminent. In the meantime, the US economy is due to receive a further boost, following the Senate’s passing of the Inflation Reduction Act late Sunday night. We will be watching US consumer and producer inflation numbers due later this week.

Despite renewed rate fears, equities remained resilient last week on the back of a relatively good Q2 earnings season. Sales were stronger than expected as nominal growth remains high, and margins have held up as corporates hike prices to pass on higher costs to their customers. Of the S&P 500 constituents, 79% reported +15% in sales and +10% in earnings per share, while in Europe, those figures were up +26% and +17%, respectively, helped by a weak euro. We are neutral equities. We are probably seeing the last quarter of strong sales increases, as consumers have started to trade down in their purchases rather than continue to absorb higher prices.

Reminiscent of the Taiwan Strait crisis of 1995, Chinese military exercises around Taiwan escalated in reaction to US Speaker of the House of Representatives Pelosi’s visit. This display demonstrates that the Chinese army can separate the island from the rest of the world. Given that 48% of containers passing through the Taiwan Strait are now blocked, current supply constraints will be aggravated if the tensions drag on. Notably, given its reliance on Taiwan for semiconductor chips, China has only banned 1% of total imports from the island. 42% of Taiwanese exports go to China, 70% of which are tech related. The current situation will likely accelerate corporates’ decisions to further diversify their supply chains. Elsewhere, following Ukraine and Russia’s agreement to release grain stores, global food prices fell the most since 2008 and are at their lowest levels since January.