Market index returns

Month to date since July 05, 2023 as of July 12, 2023

• Consumption with gumption: On August 7th, fresh data on consumer credit pointed towards increased consumer confidence and robust spending despite tightening credit conditions. Then, on August 10th, a reacceleration of headline Consumer Price Index (CPI) data in July for the first time in over a year obscured more evidence of disinflation below the surface. Core inflation (which excludes volatile components such as food and energy costs) decelerated, registering a 4.7% year-on-year increase (down from 4.8% in June) and up only 0.2% month-over-month. Optimism was tested the next day following the release of disappointing Producer Price Index (PPI) data, which registered at 0.8% year-on-year, beating estimates of 0.7% and accelerating from 0.2% in June. Nonetheless, investors continue to bet on a pause from the Fed as evidenced by an 88.5% probability of “no hike” for the September 20th FOMC meeting (courtesy of CME FedWatch), particularly as weekly jobless claims have ticked higher, suggesting the Fed proceed with caution.
• Fresh challenges in the Far East: Over in China, things generally headed in the opposite direction. CPI data fell at an annualized rate of 0.3% in July (though it was up 0.2% from June) while producer prices slipped more aggressively by 4.4% (worse than the 4.1% forecasted, but better than June’s decline of 5.4%). Deflationary concerns abound amidst flagging demand. Though Chinese officials continue to push back against this narrative, this has become increasingly difficult. China witnessed sharp declines in trade data in July with a 14.5% annual drop in exports and a 12.4% drop in imports. Finally, the U.S. ratcheted up tensions this week after President Joe Biden issued an executive order banning investment in certain types of advanced technologies in China on national security grounds. Of note, Hong Kong property stocks were among the weakest performers this week as negative sentiment weighed on local markets.
• Back by popular demand: This week, crude oil and other distillate products all registered gains north of 5%. According to data released by the International Energy Agency (IEA) this Friday, global oil demand hit a record high in June of 103 million barrels per day (bpd). The uptick was driven predominantly by China and supported by strong air travel trends and increased usage of oil for power generation. On the supply side, Saudi Arabia officially extended its 1MM product cut by 1 month while Russia also stated it would extend cuts (though it continues to increase drilling capacity). This, along with production disruptions helped fuel upward price momentum, and investors turned their attention to focus on demand. We expect that energy markets will sustain bullish momentum in the short-term, aided by strong demand and supply-side help from Saudi Arabia; however, we would caution investors not to rule out a sudden policy reversal from OPEC+ members, which could quickly shift these dynamics.
• Dependency issues: News out of Australia this week highlighted the inter-dependency of global LNG markets. Two Australian labor unions inched closer to strike action, putting roughly 10% of global LNG supply at risk. Australia predominantly supplies LNG to Asian markets. To make sense of how this impacts U.S. natural gas prices, recall that the U.S. has played a major part in filling the supply void left following Europe’s decision to diversify away from Russian natural gas post its invasion of Ukraine. LNG shortfall in Asia means that Asian buyers would look to the U.S. for spare LNG and could find themselves competing with European buyers in the same supply pool, driving prices higher. As we write, prices have come well off the highs witnessed on August 9th, but these dynamics will remain an important driver of natural gas price action over the long-term.

• Upticks from the VIX: After flatlining below the 15 level in early June, equity market volatility (as measured by the VIX) is showing signs of life again. The month of August has historically been characterized by lower liquidity (due to lower trading volume during the summer vacation period) and, therefore, higher volatility across equity markets. Additionally, a crowded short position in volatility (the largest in roughly 3 years) may prompt covering if levels continue higher from here. While we don’t necessarily expect volatility to come roaring back just yet, we contend that it’s probably time to start paying it a bit more attention to this indicator.
• About those downgrades: Also this week, Moody’s downgraded ratings and outlooks for more U.S. regional banks and revived concerns over the health of the regional U.S. banking sector. The agency cited concerns over shrinking profit margins as banks have been forced to pay customers more for deposits while being faced with higher funding costs, as well as a weak commercial real estate outlook. Importantly, all of the banks’ investment grade credit ratings were maintained. While bank earnings may face some near-term pressure, especially in the event a recession materializes, most banks appear well-capitalized and sufficiently prepared to weather a modest economic downturn. Nonetheless, we will continue to monitor the situation in the coming weeks.
• A bittersweet symphony: Fresh GDP data out of the UK released on Friday showed quarterly growth of 0.2%. Lower prices for raw materials helped support the manufacturing sector along with increased consumer spending and government spending on healthcare and defense. Normally, growth at such anemic levels would hardly be cause for celebration, but the print was likely somewhat pleasant music to policymakers’ ears at the Bank of England (BoE) who are currently tasked with reining in painfully high inflation (the highest among the G7 at 7.9%) while preventing a full-blown recession. Narrowly avoiding stagnation at this juncture might be the best-case scenario as the impact of aggressive rate increases has yet to fully feed through to the economy. We’ll be tuning in again next week when labor market data can offer more clues.
• U.S. dollar sustains gains: Since mid-July, the U.S. dollar has headed higher with the DXY bouncing off the 100 level and ending our week at 102.5 after shaking off mid-week losses following the release of headline inflation data. Several factors are supporting U.S. dollar strength – for one, PPI has suggested some stickiness in inflation as markets are betting on a pause in rate hikes from the Fed. Additionally, geopolitical risks remain elevated amidst a visible deterioration in U.S.-China relations. Perhaps unsurprisingly, Gold prices have trended lower. We expect both indicators will continue to track the potential policy response from the Fed as the next decision on rates approaches. We’ll be looking for more information in the form of economic data releases such as U.S. retail sales, housing starts, and the release of the July FOMC meeting minutes which are all due out next week.