Producers, property stocks, and pipelines lead gains

Market index returns

Month to date since May 31, 2023 as of June 30, 2023

Market commentary:

Global equity markets logged solid gains in June as the debt ceiling agreement in the U.S. removed a key overhang and the U.S. Federal Reserve’s (Fed’s) decision to hit the pause button on its hiking agenda sparked a risk-on shift. Within Real Assets, Natural Resource Equities managed to outstrip broader equities, supported by a recovery in base metals and mining and continued strength out of steel producers (up over 20% year-to-date). Commodities also headed higher, led by the energy sector – the biggest gain came from natural gas as warmer weather moved in across the U.S. Global Infrastructure and Global Real Estate securities were also well-bid. Gains in Americas midstream energy were supported by higher oil and gas prices; the beleaguered U.S. office REITs mounted a strong recovery from oversold territory while retail and mall players also notched double-digit gains – nine out of eleven U.S. property sectors are now in positive territory year-to-date. Finally, TIPS ended the month marginally lower as U.S. inflation indicators softened.Why it matters: Heading into July, broader equity markets have pared recent gains following official minutes released from the Fed’s June FOMC meeting. The minutes revealed a majority opinion (16 of 18) amongst officials that one or more rate hikes would be necessary this year to quell inflation and achieve the Fed’s long-term target of 2%, though likely at a more moderate pace. Overall, terminal interest rates from global central banks seem closer to settling, but the ultimate levels remain in flux as we reach the end of this tightening cycle. Within Liquid Real Assets, we see multiple opportunities in the current environment. Structural tailwinds are supporting sectors such as industrial and residential, and public REITs retain healthy access to the capital markets, with unsecured debt markets providing a competitive advantage. Infrastructure securities should remain in demand given their inflation passthrough traits and necessity-based assets, with global themes such as digitization and energy transformation driving longer-term growth. Finally, across commodities, upside potential abounds amidst low inventories, re-opening demand from China, possible policy stimulus, and the Russia-Ukraine war. Holistically managed exposure to listed alternative asset classes can offer diversification benefits and potentially increase the risk-adjusted return profile of a well-balanced portfolio, without sacrificing liquidity. Digging deeper: First up, we consider the Fed’s next move in light of insights from a slew of employment data released during our shortened trading week. We also gauge global manufacturing activity as other central banks consider their next moves, or perhaps remain in observation mode as the Royal Bank of Australia (RBA) opted to do this week. We end by remarking on trends in select real assets sectors: why have steel producers had such an outstanding run, and what will it take to fuel meaningful moves higher for crude oil?

June jobs figures won’t deter Fed: The ADP employment report showed roughly half a million private sector jobs were added in June, eclipsing economists’ calls for ~228k and May figures when 267k jobs were added. JOLTS job openings clocked in at 9.8M, down from 10.3M in May, but remain elevated by historical standards. Approaching Friday, markets anticipating a red hot June Jobs Report were perhaps relieved by evidence of cooling – just 209k jobs were added, down from 306k in May. Yet, with unemployment at 3.6% (versus 3.7% in May) and wages trending higher along with the number of Americans quitting their jobs, bargaining power continues to favor workers. This is bad news for inflation, and will increase the Fed’s conviction as it prepares to resume rate hikes.
Survey says…: This week, the U.S. ISM Manufacturing print exposed the eighth consecutive contraction in manufacturing activity, which quickened its pace from 46.9 in May to 46.0 in June as demand softened. This compares with the S&P Global U.S. Manufacturing PMI, which decreased from 48.4 to 46.3. The news wasn’t all bleak, however, as robust S&P Global U.S. Services PMI remains in expansion territory (54.4 in June) for the fifth month running, providing an offset that is helping to stabilize aggregate economic growth. In China, following weak manufacturing data, the Caixin/S&P Global Services PMI also slid, coming in at 53.9 in June, down from 57.1 in May. Finally, in the Eurozone, the European Central Bank (ECB) must grapple with manufacturing activity that witnessed its sharpest contraction since early 2020, with PMI at 43.4 versus 44.8 in May.
Another stay for the RBA: By contrast, the Royal Bank of Australia (RBA) opted for a surprise pause, holding its cash rate steady at 4.1% for the second month running. The decision follows an encouraging downshift in inflation from 6.5% in April to 5.6% in May, though current levels remain well above the central bank’s stated target range of 2-3%. Local equity markets in Australia were initially encouraged by the decision, but have since fallen sharply entering July on the increased likelihood of additional U.S. interest rate increases and the aforementioned weaker-than-expected activity data out of China (Australia’s largest trading partner).
Forging ahead: Steel producers had a standout run in June, up ~16% month-to-date and nearly 20% year-to-date thus far. Globally, steel remains in high-demand with consumption in Europe projected to rise and production restrictions in China fueling expectations for reduced supply. In our view, while overall conditions for base metals favor producers and diversified miners with exposure to Asia as China’s re-opening progresses, supply chain issues are making steel markets appear relatively more balanced, if not frothy, in certain places.
Saudi “Arrabiata”: Like the well-loved Italian pasta dish, we imagine Prince Abdulaziz Bin Salman is also a bit angry. After all, how many production cuts does it take to get crude oil back above $80/bbl? This week, Saudia Arabia extended its voluntary 1M barrels per day (bpd) cuts through August. In addition, Russia is voluntarily reducing production by 500,000 bpd. Taken together, OPEC+R is now withholding approximately 3.6% of the global oil supply from the market. Yet, the price response thus far has been underwhelming, and crude oil remains mired in a tight range near $75/bbl. With mixed signals influencing global crude oil fundamentals, we believe that crude prices will continue range-bound trading as a weakening demand outlook continues to keep a lid on prices.

What we are watching: Heading into the first full week of July, the Fed will issue its fifth Summary of Commentary on Current Economic Conditions, perhaps better known as the Beige Book. More data on inflation is also due out ahead of the next FOMC meeting, which is scheduled for July 25-26th. Finally, we touch on important meetings happening in Beijing and how recent war and weather developments might impact the agriculture space.

50 shades of beige: Starting on Tuesday, we’ll hear from each of the respective presidents of four Federal Reserve Banks – San Francisco, Cleveland, Richmond, and Atlanta – before diving into the latest Fed Beige Book due to be released on Wednesday. The report will help paint a detailed picture of economic conditions in each of the 12 Federal Reserve Districts which support the U.S. Federal Reserve System. Markets will be watching for details on lending activity and credit conditions across the U.S., which will further inform the Fed’s July rate decision.
CPI in July: With the next FOMC meeting fast approaching, June Consumer Price Index (CPI) data (both headline and core) due out on July 12th will be back in sharp focus. Median forecasts are calling for a 0.3% increase, but any significant deviation could be enough to influence the pace and/or magnitude of the next rate hike. Services inflation will be under scrutiny, which remains a key concern for the Fed, particularly given upward wage trends. Producer Price Index (PPI) data is also due out on Thursday, which will help round out the wholesale inflation picture.
China claps back: On July 3rd, China moved to curb exports of key semiconductor inputs in the name of national security concerns – a move which appears plainly retaliatory following U.S. technology export restrictions. The announcement came ahead of a scheduled visit to Beijing by U.S. Treasury Secretary Janet Yellen, who has been tasked with keeping communication lines open at a time when complex Sino-American relations are fraying in increasingly public ways. While no significant breakthroughs are expected, markets would welcome any alleviation in tensions that could pave the way for more productive future talks.
War and weather: While concerns over extreme drought linger, additional rainfall expectations from El Nino have come back into focus. Rainfall for the last week of June and the first week of July will have a meaningful impact on U.S. crop yields as many crops are most sensitive to moisture levels during these two weeks of the growing cycle. Wheat prices found additional support in June on elevated concerns over Russia’s (and Ukraine’s) ability to export as much as last year given the ongoing military conflict and severe drought conditions. The Northern plains in China have also experienced severe drought, and wheat production there is expected to fall. We expect these factors to keep wheat prices elevated this season.

View dashboard View deep-dive commentary