Another Monday, another week full of important figures and decisions that could affect your clients’ investment decisions.
Has the Fed managed a soft landing? Forecasts suggest that job creation in the U.S. could have decelerated again in July, which might bolster arguments for the Federal Reserve to maintain steady interest rates this fall.
On Friday, the Department of Labor is predicted to announce that the U.S. economy added 184,000 jobs in July, a decrease from June's 209,000, as per Reuters' poll of economists. The unemployment rate is projected to stay at 3.6%, while the month-over-month average hourly wage increase is anticipated to slow down to 0.3% from June's 0.4%.
The job market has shown resilience throughout the year despite the Fed raising interest rates to two-decade highs. However, June's hiring figures, which were cooler than expected, broke the trend of several months of surpassing expectations. Both investors and economists will closely monitor whether this deceleration continues.
The employment stats will also be scrutinized by the Federal Reserve. The central bank has increased interest rates by 0.25 percentage points to a range of 5.25% to 5% just this week. The market is split on whether this hike will be the cycle's last, and Fed Chair Jay Powell made it clear in this week's meeting that the decision about a potential September rate hike is still in the air. A robust report this month could bolster arguments for further rate hikes, while a disappointing one could dampen the enthusiasm for further tightening.
Mortgage costs are already at their highest since 2008 for the Brits, and most pundits are predicting 25 or even 50 basis point hike this 3rd August. Economists and money markets are predicting a quarter percent, HSBC, Barclays and UBS are all expecting double that.
Traders have pushed the pound up 6% this year as they expect rate rises, but Sterling’s volatility has risen even as euro and dollar volatility levels have slipped.
Figures released this morning show that the UK’s home lenders approved 54,662 mortgages last month, the most since October 2022, when the housing market faltered after a surge in bond yields.
Cyclical downturns are one thing — but this time, say a number of commentators, it’s different.
"Employers are beginning to appreciate that building giant facilities to warehouse their people is no longer necessary," Richard Murphy, political economist and professor of accounting practice at the UK's Sheffield University, told news agency Reuters.
A June report from Moody's Investors Service said that international banks are responsible for approximately 50% of the outstanding $6 trillion in commercial real estate debt, with the majority due for maturity between 2023 and 2026 — so if anything starts hitting the fan, it could start any time soon.
In their semiannual reports, U.S. banks have disclosed escalating property losses and cautioned that additional ones are on the horizon.
International financiers providing loans to American industrial and office REITs, who also offered credit risk assessments to data firm Credit Benchmark in July, have stated that companies in the sector now have a 17.9% higher probability of defaulting on their loans than was projected half a year ago.
Jones Lang LaSalle said that the leasing market slumped by 18% in the first quarter of this year – in the UK commercial property values have already fallen by around 20% from their peak.
Citigroup has upgraded its end-of-year forecast for the S&P 500 index by 15%, citing an increased likelihood of that soft landing we spoke about earlier coupled with potential earnings growth.
The financial institution anticipates the S&P 500 (SPX) will close 2023 at a level of 4,600 points, marking a modest rise of 0.4% from the index's Friday closing figure of 4,582.23. Last month Citi was "fundamentally confident" that the index would finish up at 4000.
Looking ahead to 2024, the projection is even more optimistic with the index expected to escalate to 5,000 points, a jump from the earlier prediction of 4,400, which constitutes roughly a 9% increase from current values.
In addition, Citigroup has delayed its forecast for a possible U.S. economic downturn to the initial half of 2024, moving it from the final quarter of the current year. The bank's analysts believe the revised S&P 500 estimates better mirror this anticipation.
Moreover, the Wall Street firm now anticipates per share earnings for S&P 500 companies to reach $220 in 2023, a rise from the earlier estimate of $215.
As rates have continued to rise, so the delta between the S&P 500 and a 10-year Treasury bond has slipped by 1.1% — the closest it has been for 21 years. The equity-risk premium has been lower — 0 by some measures in the late 1990s dotcom bubble.
Your equity investors may have comfort that normality will return if bond yields slip. Even though Fed Chair Jerome Powell hasn’t ruled out more rate rises, investors believe there is only a 30% chance of another interest-rate increase.
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