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Active Thinking

GAM Investments’ David Dowsett reflects on the outlook for inflation, and considers a potential ‘Goldilocks’ scenario for emerging markets. He also highlights some events to watch during the week ahead.

19 July 2023

David Dowsett, Global Head of Investments

The key indicator for investors over the last week has undoubtedly been US inflation. Last Wednesday’s Consumer Price Inflation (CPI) came in much lower than forecasts, both at the headline and core level.

Headline CPI for June was 0.2% on a month-on-month basis, and 3.0% year-on-year – both 0.1% softer than consensus forecasts. Core CPI came in 0.2% month-on-month, below expectations of 0.3% - that is the weakest since February 2021 and a meaningful improvement of what we have been seeing over the past few months. Annual core inflation was 4.8%, compared to the expected 5.0% consensus forecast.

There were some one-offs in the headline numbers that may have made them excessively weak. Perhaps surprisingly for anyone going on holiday in Europe over the next few weeks, air fares were fairly soft on a month-on-month basis, and there was also a well-advertised decline in used car prices. But all in all, I think it is fair to say that declines were broader, particularly from the goods sector with regard to China where we have been seeing some deflationary numbers over the last few weeks. Nonetheless, there was a big improvement in US inflation.

Market-wise, US two-year yields fell by c 0.25% over the week, the largest decline since the Silicon Valley Bank collapse. Clearly the Federal Reserve (Fed) is still going to hike interest rates at late-July’s meeting. But there is now more speculation that it will not hike again beyond then. And there is more talk of a potential ‘soft landing’ coming into the debate again – this could be an over-reaction to one number but it does reflect how sentiment has moved. Building on some weaker inflation data in Europe over the past few weeks, this adds weight to the idea that we could be getting close to slaying the inflation dragon. UK CPI, released on the morning of Wednesday 19th, came in slightly below forecasts – signs that pricing pressures are finally abating in the country where it has been most stubborn in the developed world could add grist to the mill.

Last week marked the beginning of the earnings season, with good numbers from JP Morgan, Citicorp, Wells Fargo and BlackRock. Although they did not lead to big one-day moves, they were good results that underline what my colleagues Niall Gallagher and Adrian Gosden have been highlighting – how banks are benefiting from higher interest rates.

This week we have Netflix, Tesla and ASML reporting on Wednesday, then TSMC on Thursday. To some degree, these stocks have the artificial intelligence (AI) theme embedded in their returns this year so their results will be a key focus this week, as will be Wednesday’s US retail sales.

Already this week we have had Q2 GDP from China coming in at 6.3% year-on-year, compared to expectations of 7.1%. Probably more important given all the seasonal variations we have had, quarter-on-quarter growth was 0.8%, a sharp slowdown from Q1’s 2.2%, although June’s retail sales number was slightly ahead of forecasts. All-in-all, there are signs that the momentum in China is not too bad – there has been some stabilisation in the data, and the property sector is still showing signs of weakness, but overall data from China has been a mixed bag.

But one notable theme over the last week has been a weaker US dollar, and even on top of that, a weaker renminbi. That is important for two reasons.

  • It means China’s effectively exporting global disinflation – something that is important for ongoing CPI releases and central bank reaction function.
  • Consequently, the euro in particular has strengthened on a trade-weighted basis, something that may be significant in terms of what the European Central Bank does. More broadly, currencies moving in ways that they have not done for a while could be important for other central bank decision making.

Putting all of these factors together, in our view a weaker US dollar and disinflation should be very positive – potentially even a ‘Goldilocks’ scenario – for emerging markets (ex China).

Important disclosures and information

The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Past results are not necessarily indicative of future results. Investors could lose some or all of their investments.

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