Inflation sinks as bulls don’t blink

Inflation drops – worries remain
Russian moves revive food inflation fears
Chinese economy slows
Technology companies’ earnings mixed

During July markets have been digesting the next leg in falling inflation figures and news on mixed macroeconomic picture in different markets. Developed markets’ stock index MSCI World (EUR) has risen by 3,29%, while emerging markets stocks’ index MSCI Emerging Markets (EUR) has added 5,8%. At the same time, bond yields have risen slightly, too, with 10‑year US Treasury yields rising to 3,95% (3,84% 1 month ago), while German 10‑year Bund yields ended at 2,49% (in comparison to 2,39% a month ago).
Inflation drops

United States has continued showing encouraging signs of easing inflation. Measured by Consumer Price Index (CPI), Year‑on‑Year (YoY) inflation has dropped to 3% on June reading – lower, than expected by the market participants (3.1%), sharply down from 4% a month ago and long way down from the record 9.10% reported last year. This marks the slowest price rises in the worlds’ largest economy since the 2021 Spring. In its July meeting, FED (Federal Reserve) decided to raise interest rates by another 0.25% to 5.25‑5.50% ‑ a move believed by some market participants to be the last hike for the foreseeable future. In a slight contrast to the US news, Eurozone inflation figures came in higher‑than‑expected at 5.5% (vs 5.4% expected) – itself sharply down from the 10.6% level seen last year. Also, ECB (European Central Bank) raised rates by 0.25% to 3.75% with the real probability of raising it again in September. With that in mind, currency markets have been rather volatile with EUR/USD currency pair showing sharp moves in the 1,09 – 1,12 range.

Food inflation worries revived

Policymakers have long been worried about the tight labor markets (hence, pressure for higher salaries), stubborn core inflation figures etc. in their inflation struggle. In turn, Russian decision to drop out of the UN‑backed Ukraine grain deal in July could only prolong the list of potential factors in the inflation story. Russia’s exit from the deal, then measures to limit the grain vessels’ movement in the Black sea and then finally targeting the grain infrastructure on the Ukrainian Black Sea ports could potentially curb the Ukrainian grain exports. As tensions escalated, wheat price popped by almost 18% in July (September deliveries, European market). Should these circumstances continue, this will sure add the pressure on the food‑related commodities prices to rise, thus undermining the otherwise mostly successful downward movement in global inflation, so far.

Milling Wheat (Sep 2023 delivery) price, EUR/t

Chinese economy slows

At the same time, Chinese economy – the bellwether of the Emerging Markets – has been showing further signs of economic slowdown. Thanks to lower level of economic activity last year (due to Covid 19 measures, at the time), the economy grew 6.3% YoY, sharply lower than 7.3% forecasted. That comes in unsurprising bearing in mind the 8.3% YoY drop in exports, sharply slower retail trade growth (3.1% YoY vs 12.7% YoY growth in May) and slow real estate market. Curiously, a record 11.58 million of fresh Chinese universities’ graduates are entering the workforce this year. They are apparently off to a rough start in their careers, as the youth unemployment in China has reached a record 21.3% (roughly double the 2018 level & double the current US level). While this high level of unemployed young people is actually comparable to the Southern Europe levels, this is a new phenomenon in China and will further signify the economic challenges that China is facing.

Not all tech doing great

This year’s rally in equities has so far relied heavily on technology‑related companies, thanks to much‑hyped investor expectations about Artificial Intelligence (AI). With earnings’ season in full swing, many companies have managed to keep up with the high bar of expectations, although not without the disappointments. Taiwan Semiconductor Manufacturing company limited (TSMC) – the largest chipmaker in the world by market value – lowered the outlook for 2023, as the AI‑related demand may not compensate the otherwise slower global demand for chips this year. Thanks to US‑China tensions, investors were not too excited about the earnings of another major name in the AI story, Dutch ASML, which is a leading player in the semiconductor industry, globally. Lastly, some market darlings, like Tesla or Netflix have slipped sharply (‑9.7% and ‑8.4%, respectively) after posting disappointing results. While that may not represent a market‑wide trend, episodes like that will get investors pickier about the technology companies’ prospects, going forward.

Market view

While there has been no major stance change, our investment team has been closely following the developments in the inflation trends coupled with economic prospects. A rather neutral market‑positioning is due thanks to the balanced‑out factors on the positive and negative in the foreseeable future.

Luminor House View

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