Market index returns

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

• Laments over labor markets: While labor data may be headed in the right direction, we fear that the pace may prove too gradual for policymakers, especially in light of recent indicators. Markets are digesting a trifecta of employment data, which has underscored the continued resilience of U.S. labor markets. The June JOLTS (Job Openings and Labor Turnover Survey) report showed 9.58M job openings (a touch shy of calls for 9.6M) while layoffs came down from 1.55M in May to 1.53M in June. July’s ADP employment report showed 324k jobs were added (versus expectations of 175k, but down from 455k in June) with gains skewed towards service industries and small businesses. Most notably, July nonfarm payrolls data revealed a mixed bag: 187k jobs were added versus expectations of 200k while June was revised down to 185k from 209k; however, wages rose more than expected and the unemployment rate edged lower to 3.5% from 3.6% in June. The dollar (DXY) slipped and the gold price gained in response.
• Much ado about manufacturing: Manufacturing activity contracted in July for the ninth straight month, with the S&P U.S. Manufacturing PMI print up from 46.3 in June to 49.0 for July and the ISM Manufacturing print at 46.4%, up from June’s level of 46.0% but slightly below a forecasted 46.8% due to declines in manufacturing employment (PMI readings below 50 indicate contraction). In Europe, Germany disappointed after its manufacturing PMI fell to 38.8 in July from 40.6 in June. Finally, the Caixin/S&P Global Manufacturing print fell into contractionary territory, registering at 49.2, down from 50.5 in June, underscoring China’s difficulty in supporting its economic recovery. While Services PMI remained in expansionary territory across most developed markets (save for Australia, which joined France below the 50 level in July), growth has continued to lose momentum. Here’s to hoping that central banks can still forestall a recession and that PMI trends aren’t foreshadowing one.
• What Janet’s Yellen about: Late on Tuesday, Fitch Ratings downgraded its U.S. debt rating from AAA to AA+, citing concerns over growing debt burdens and last-minute bipartisan standoffs over debt limits. The downgrade comes as the U.S. prepares for $1 trillion of new debt issuance in Q3. U.S. Treasury Secretary Janet Yellen was among the first to condemn the demotion as “arbitrary and based on outdated data.” Nonetheless, markets reacted – 10-year treasury yields shot up from 3.96% at July’s month-end to a ~9-month high of 4.18% on August 3rd (perhaps accelerated by a coincident rate increase from the Bank of England (BoE), which we cover in more detail below). Meanwhile, equity markets (and liquid real assets classes) also ceded some ground. We do contend a multitude of factors were at play here, including continued earnings contraction into a seasonally weak period for equity markets, and attribute most of the recent weakness to profit-taking (at least for now).
• Amidst the gloom, can Europe bloom?: Following a rate increase from the ECB to 3.75% last week, we imagine policymakers are disappointed by the meager progress evidenced by recent economic results. Eurozone Flash GDP figures released on Monday showed a modest 0.3% expansion during Q2 (beating expectations of 0.2% in aggregate, but likely unsustainable with most of the surprise upside growth coming from Ireland and France). Later in the week, the BoE hiked by a quarter point to 5.25%. UK inflation has come down meaningfully from an annualized high of 10.1% in January 2023 to 7.9% in June, but remains too far off-target for central bankers to back down just yet (it still ranks the highest among the G7). Yet, on the listed property front, performance has begun to improve and discounts should compress as peak interest rate expectations move closer. Encouragingly, we have seen a sequential acceleration of organic rental growth driven by indexation clauses embedded in most leases, implying relatively attractive unlevered IRRs compared to only marginally positive real bond yields.

• Bold moves from the BoJ: Last Friday, the BoJ unexpectedly raised its cap on longer-term interest rates, tweaking its yield curve controls to allow 10-year government bonds to move closer to 1% (an increase in its tolerance band of +50 bps). This was done in a deliberate attempt to avert a selloff in the yen (like the one witnessed in September 2022) and could, perhaps, mark the first step towards future policy normalization, though Governor Ueda fervently insists this is only a modification of their still-dovish agenda. We are skeptical – the BoJ intervened twice this past week to cool an ensuing rapid rise in bond yields (the 10-year JGB hit a 9-year high). Is this sustainable? We will be carefully monitoring developments over the coming months to find out. 
• Keeping tabs on the U.S. consumer: Data on U.S. consumer credit is due out next week on August 7th, which will offer important clues on the overall consumption picture. Recall that the net change in consumer credit slowed considerably from a downwardly revised $20.3B in April 2023 to just $7.2B in May. Additionally, non-revolving credit (which measures debt paid back in a single installment, such as a car loan or a mortgage) actually fell in May for the first time since April 2020 (immediately following the COVID-19 pandemic outbreak). Borrowing   trends and price indicators will provide important fodder for Fed decision-making in the coming weeks: the Consumer Price Index (CPI) and Producer Price Index (PPI) are due out on August 10-11th, and Personal Consumption Expenditure (PCE) data – the Fed’s preferred inflation benchmark will next be released on August 31st – it  stepped down to 3% in June from 3.8% in May while core also rose less than expected to just 4.1%. 
• Give the People(’s Bank) what they want: Pan Gongsheng was crowned governor of the People’s Bank of China last week – he was also appointed secretary for the Communist Party in early July, marking the first time in 5 years that one person has held both positions. While Mr. Pan has the credentials and competency to perform the job, he lacks an elite pedigree and, therefore, may not have the political sway. As the Chinese government seeks ever-greater control over the economy, it is unclear whether Mr. Pan will find himself influencing policy decisions or merely administrating them. This Thursday, he promised more support for the private sector and said the central bank would be rolling out guidelines, but we expect that more concrete policy measures may not develop until later in the year. Moreover, initial stages of stimulus may have an element of 'pushing on a string' as sentiment in China remains depressed.
• Governments are going green: The United States is in the process of revamping its infrastructure, with $550 billion in new spending approved in 2021. This development is providing substantial tailwinds across the U.S. infrastructure value chain, including construction and engineering services, materials providers, equipment manufacturers, and owners and operators of infrastructure. Ongoing changes in energy, mobility, and digitalization are introducing new dynamics in the infrastructure sector, and upgrades with environmental sustainability and climate resilience in mind create potential new opportunities for investors. Importantly, these changes are happening here and now – in June, shipping giant Maersk ordered 6 new ships equipped with engines that can run on renewable fuel, namely green methanol. Find out more about this important mega-trend from our partners at the DWS Research Institute here.