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Active Thinking

At GAM Investments’ latest Active Thinking forum, David Dowsett reflects on the contrast between the latest US payrolls data and China’s inflation numbers. He also highlights the events to watch in July.

12 July 2023

The rise in bond yields has been the most notable occurrence in markets over the last week. We have now completed the round trip in terms of yields since the collapse of Silicon Valley Bank; the plunge in yields in the aftermath of the crisis has now fully reversed. We are back above 4% in the 10-year in the US. In other markets, there has been a dramatic pricing of interest rates. For example, in the UK 175 bps of extra tightening has been priced in at the short-end since May; 2-year yields in the UK are now the highest since 2007, and it is a similar picture in France, while US real yields are now the highest since 2008. However, that is not currently causing any crack in the broader risk complex so equity markets are remaining relatively well behaved

Last Wednesday’s ADP job report, which is the precursor to the main payrolls report, was extremely strong and as a result, we saw one day weakness in equity markets. However, it did not feed through. The main payrolls number published on Friday was the first miss relative to expectations in 15 months but it was still a relatively healthy number with 209,000 jobs added on the month and the unemployment rate fell again to 3.6%. This was not an imminent sign of a marked slowdown in private sector activity in the US.

In contrast to the healthy economic picture in the US, we saw the price data releases from China on Monday morning. The Producer Price Index (PPI) was down 5.5% year-on-year in China and inflation was at zero; this was a surprise compared to the expectations of just a few months ago. It is worth reflecting on these figures in the context of very low unemployment in the US and the very high youth unemployment we currently see in China.

Looking forward, we will be considering the following:

  • The US CPI number on 12 July: I think regardless of the number, the Federal Reserve is going to hike again in July, which is also expected by the market. However, it is still an important release for the ongoing path of interest rate policy
  • The NATO summit: This will be important in the context of what is going on in Ukraine
  • The G20 finance ministers meeting
  • Earnings season: On Friday, JP Morgan, Citi and BlackRock will report, followed by Tesla on 19 July. After that the numbers will come thick and fast. These will be important as there is much discussion about how much of a slowdown is priced in earnings in the US and other markets and these earnings will provide hard data to chew on. July will be a very information-packed month with Apple, Microsoft and Google all reporting before month end
  • The European Central Bank, Federal Open Market Committee and Bank of Japan will have monetary policy releases at the end of the month

It may feel like the beginning of the summer period but I do not think we are in holiday mode from a market perspective yet. July can be a busy month, while August is traditionally quieter. But there is still a lot for markets to process over the next couple of weeks.

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