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- Real Assets enter September on steadier footing
Market index returns
Month to date since July 31, 2023 as of August 31, 2023
Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.
Market commentary:
Following a stellar July, August proved a challenging month as risk assets stumbled into the Fall. Broader equity markets shed over 6% through August 18th, pressured by rising bonds yields, before shrugging off U.S. Federal Reserve (Fed) Chairman Jerome Powell’s comments at Jackson Hole and mounting a recovery into month-end, drawing confidence from supportive moves out of Beijing and turning their attention to a slew of fresh economic data prints. August also set year-to-date returns in Real Assets back on an upward trajectory. For the full month, TIPS and Commodities sustained minor losses, a with the latter supported by strength across energy commodities. Slippage across Global Real Estate, Natural Resources, and Global Infrastructure was modest, and only slightly steeper than broader equities, with pervasive pressure amongst Asia ex Japan names resulting in outsized losses, fueled by concerns over the state of China’s economy.
Why it matters: During August, U.S. 10-year Treasury yields bounced off 4.00% on August 9th and hit a 4.36% high as fears over an overheating economy manifested in upward pressure on bond yields. However, as the economic picture came into better focus, 10-year yields moderated in the days leading up to month-end, and the 10s-to-2s spread has come in sharply since August 28th as yields on short-term bonds fell ~17 bps. Markets are betting that encouraging economic data will tame Fed hawks, and while the odds of a September Fed hike have diminished, we would note the increased odds of a rate hike in November, as well as continued disappointment on economic conditions in China and the ongoing war in Ukraine, as factors that could contribute to flare-ups in broader equity market volatility later this year. We maintain that an allocation to Liquid Real Assets can help investors reap the benefits of diversification, potentially gain some downside protection, and increase or maintain liquidity through uncertain times, all while offering attractive total return potential over the long-term.
Digging deeper: This week, we focus on the broader macro picture and remind our readers to check out our deep-dive commentary for more Real Assets insights at an asset class and sector level. Below, we cover broader macro developments in the U.S. that have supported a relief-rally across risk assets, including comments from the U.S. Federal Reserve Chairman, recent inflation prints, fresh labor market data, and economic activity indicators.
Why it matters: During August, U.S. 10-year Treasury yields bounced off 4.00% on August 9th and hit a 4.36% high as fears over an overheating economy manifested in upward pressure on bond yields. However, as the economic picture came into better focus, 10-year yields moderated in the days leading up to month-end, and the 10s-to-2s spread has come in sharply since August 28th as yields on short-term bonds fell ~17 bps. Markets are betting that encouraging economic data will tame Fed hawks, and while the odds of a September Fed hike have diminished, we would note the increased odds of a rate hike in November, as well as continued disappointment on economic conditions in China and the ongoing war in Ukraine, as factors that could contribute to flare-ups in broader equity market volatility later this year. We maintain that an allocation to Liquid Real Assets can help investors reap the benefits of diversification, potentially gain some downside protection, and increase or maintain liquidity through uncertain times, all while offering attractive total return potential over the long-term.
Digging deeper: This week, we focus on the broader macro picture and remind our readers to check out our deep-dive commentary for more Real Assets insights at an asset class and sector level. Below, we cover broader macro developments in the U.S. that have supported a relief-rally across risk assets, including comments from the U.S. Federal Reserve Chairman, recent inflation prints, fresh labor market data, and economic activity indicators.
- Powell’s bark loses its bite: On the margins of Fed Chairman Powell’s speech at Jackson Hole last Friday, which laid out the same, all-too-familiar cautionary tale as in previous speeches and commentaries, market participants detected a glimmer of positivity, grabbed it, and traded on the optimism. Despite hawkish warnings that the central bank remains “prepared to raise rates further”, Powell’s characterization of recent developments, including an acknowledgment of progress on taming inflation as well as a nod to better-than-expected economic growth, was interpreted as a concession. Taken together with a more balanced assessment from the broader central bank committee as evidenced by the July meeting minutes, markets have rallied in response and are betting heavily on a “no-hike” scenario in September as evidenced by a 93% probability per the CME FedWatch Tool as of September 1st.
- PCE supports a pause: Personal Consumption Expenditure (PCE) data (the Fed’s preferred inflation gauge) released on Thursday revealed just +0.2% monthly increases for both headline and core (which excludes more volatile food and energy prices). Despite still-elevated annual increases of +3.3% for headline and +4.2% for core (largely in line with expectations), sustained monthly increases at such moderate rates represent an encouraging sign, especially for inflation specific to goods, which fell by 0.3% from July levels. Strong consumer spending was balanced by reductions in disposable personal income (in real terms) and personal savings. In aggregate, the data suggests that a Fed decision to hit the pause button at the September 20th FOMC meeting could be warranted.
- Labor’s big day comes early: Ahead of the September 4th Labor Day holiday in the U.S., markets digested fresh employment data. Wednesday’s ADP employment report revealed just 177k private-sector jobs were added in August (down from 371k in July and short expectations of 200k). However, the big news came in the August Jobs Report released by the Department of Labor on Friday morning, which showed a surprise jump in the unemployment rate to 3.8%, up from 3.5% in July, and a surge to 7.1% in real unemployment (the real rate of unemployment is a more comprehensive measure, one which also captures underemployed and discouraged workers). Additionally, earnings rose at a lower-than-forecast rate, and while nonfarm payrolls grew by 187k (above estimates of 170k), June and July estimates were downwardly revised by 110k (collectively). Additionally, the labor participation rate increased as job openings fell for the third month in a row, this time below 9 million (to 8.83M in July) for the first time since Q1 21.
- Final comments on commerce: The final week of August ushered in a few other tidbits of economic insight, which we’ll pack into our final bullet for your Saturday morning perusal. First, manufacturing data continued to register in contractive territory but was better than feared with the S&P U.S. manufacturing PMI print at 47.9 (versus an expected and prior-month level of 47.0) and ISM manufacturing at 47.6% (a 1.3% improvement from July and a solid beat versus an anticipated 46.6%). Additionally, the U.S. Commerce Department reported a modest downward revision of Q2 GDP to a still-solid 2.1% from initial estimates of 2.4%, suggesting things are still headed in the right direction and that a soft-landing for the U.S. economy is still in the cards.
What we are watching: Looking ahead, we turn to China as the government opens additional economic lifelines in an attempt to avert a crisis before touching on developments within each of our major real asset classes. Within commodities, we explain why grain prices have suffered steep losses despite the Russia-Ukraine conflict continuing to dominate news headlines. We also address some challenges in a unique segment of the renewable energy space before sharing our direct team’s global take on property market trends.
- China’s policy pivot: This week, following supportive measures we highlighted in our mid-August issue, China took more drastic steps to prop up its struggling economy and came to the aid of its weakening yuan. Additional support came from the People’s Bank of China (PBOC), in a joint statement with the National Administration of Financial Regulation (NAFR), which announced significant cuts on minimum mortgage down payments as well as efforts to encourage lower mortgage rates from banks. Additionally, the PBOC said it would slash foreign exchange reserve requirements from 6% to 4% to signal its commitment and help stall a slide in the yuan. Finally, the government is offering some forms of tax relief. The positive impact of this news was amplified as it coincided with the Caixin and S&P PMI prints moving back into expansionary territory in August. We will be watching closely for more signs of stabilization as China attempts to ward off an economic crisis.
- Assessing the pains across grains: Within commodities, Wheat has underperformed other grains (and commodities overall) as ongoing negotiations to provide insurance for ships transiting through Black Sea ports have lowered the probability of a worst-case scenario for Russian-Ukrainian wheat exports. Despite making headlines, the conflict has yet to disrupt material volumes after multiple false starts from wheat futures. Russian Foreign Minister Lavrov said that Russia is ready to come back to the grain deal if conditions are met. In addition, near-term weather reports have shown improved rainfall and lower temperatures across the U.S, Midwest. On the bright side, soybean oil and soybeans have led the way for the grains complex under favorable weather conditions and a drop in supply from Argentina, which helped propel soy crush margins to record levels. Overall, while we expect better crop production driven by improving weather forecasts, we still see upside from spot prices and potential supply risk from any further escalations in the Black Sea corridor. We will be closely watching crop tours and weather updates, which should drive near-term volatility in grain markets.
- A global perspective on property: As much of this week’s issue centered on developments in the U.S., we’ll attempt to balance this by offering up our direct real estate team’s Global Strategic Outlook. Higher interest rates have filtered into real estate valuations, causing prices to drop 10%-20% globally; yet, fundamentals are generally stalwart, evidenced in tight vacancies and rising rents. E-commerce growth, coupled with efforts to bolster supply chains, is driving demand for warehouses. Chronic housing shortages also persist across most major European, Asian, and U.S. cities. We believe that the outlook is positive for the next 12 months and that commercial real estate has largely priced in today’s interest rates. Rent growth may slacken as economies slow, but any leasing pullback should be mild, and tighter financing should curb construction, paving the way for fundamentals to re-tighten next year as economies gather momentum. Find more in the full publication here.
