A brighter end to a dull month
After a pretty downbeat month for stock markets, they are ending the month on a brighter note. Jerome Powell’s Jackson Hole speech did not rule out the possibility of another rate increase as he referred to the underlying resilience of the US economy and also offered a few new insights. There was little reaction to Mr Powell’s speech at the short end of the curve, however, yields have fallen at the longer end, with the ten-year US treasury yield back to 4.1%. The dollar basket drifted slightly lower but remained higher on the month. The Vix index has drifted back to its lows at the start of the month, suggesting stock investors remain confident. The bond market continues to tell one story the equity market another.
The latest jobs report from the US did suggest the employment market is cooling further and may have helped the view the Fed will wait at least till October before deciding whether another 25 basis points is necessary.
US stock markets remain buoyant as investors are happy to chase extended valuations, many of them in the tech sector. On the other hand, the UK stocks remain as unloved as ever they do. The FTSE 100 has a list of stocks with yields in excess of 5%, often well in excess, with the ability to be sustained, but investors appear not interested. Our banks trade below book value, some materially so, despite an environment that should be profitable for them. Investors were falling over themselves to own Kenvue, the Johnson and Johnson spin at over 20x earnings multiple yet, ignore both Reckitt and Haleon on more attractive multiples. One could go on, what will change investor perception is hard to fathom. One has got to think that the UK market is, optically at least, pretty good value at present.
Soon the nights will be closing in and the year will be sadly drawing to a close. This year has been a shocker so far for economic forecasters. Growth has been more resilient in the US than almost everyone forecast, and weaker in China as it fails to grow hindered by the policies of its current leader. As an example, this statement was taken from the IMF forecasts at the start of the year. “The rapid spread of COVID-19 in China dampened growth in 2022, but the recent reopening has paved the way for a faster-than-expected recovery”.
US interest rates will peak higher than expected and the 2 cuts many were anticipating before the year’s end, now look highly unlikely. The Citi economic surprise index for the US economy has rolled over in recent weeks. Suggesting that economic data is now failing to meet expectations. That may be another reason 10-year treasury yields have fallen recently. Worth keeping an eye on, at present US equities appear to react positively to lower 10-year US treasury yields, which may not last.