Good News Is Bad News

Against some positive economic news markets broadly fell over the week. One of the worst performing markets was the UK with the FTSE 100 declining by 3.6%. Over the pond in the US markets were slightly more subdued as the Fourth of July celebrations shortened the week and perhaps with an eye on forthcoming second quarter earnings reports: the S&P closed 1.2% lower.

Conventional wisdom would lead us to believe that as equity markets fall bond market traditionally cushion investors. As in 2022, this was not the case over the shorter timeframe of last week. Bond markets also fell with the UK gilt market falling by 2% whilst 10 year US Treasury yield moved north of 4% for the first time since 2008.

The primary cause of these sharp moves across markets once again is interest rates. Whilst no major central banks changed their rates, expectations of increases and – perhaps more pertinently – further noise around how long rates may remain at ‘elevated’ levels spooked investors.

Minutes released from the Federal Reserve’s last policy meeting revealed that whilst the decision not to raise rates was unanimous there was a hawkish tone to the conversation. Almost all members expect further rises through 2023.

In good news the ADP private payrolls June number came in at 497,000 against expectations for 225,000 although June nonfarm payrolls slightly disappointed at 209,000 versus an estimated 230,000. However, average hourly wage gains continue to remain elevated at 4.4% with the FED preferring to see this figure closer to 3.5% in order to see inflation realistically heading toward the 2% target.

Back in Europe consumer inflation expectations for the next 12 months once again fell with participants expecting to see a fall to 3.9% by this time next year. Christine Lagarde, ECB President stuck to her stance that policymakers still have work to do to bring inflation back to 2%.

Closer to home the increase in mortgage rates appears to be taking their toll on house prices which fell by 2.6% according to Halifax – the largest fall since 2011. According to Right Move, average mortgage rates for a five year term are now north of 6%.

China’s stuttering emergence from the pandemic continues with markets broadly negative. Premier Li Qiang, China’s second highest ranking official promised to spare no time in implementing policies to strengthen the country’s post pandemic recovery although there were limited details.

A gradual climb in the VIX which measures volatility in markets and is also knows as the fear gauge continues to highlight the fragility of markets. We expect more of the same this week with a raft of data releases across the globe.

In a Goldilocks scenario, economic conditions that on the surface are good news (too hot) will inevitably continue to lead to increases in interest rates, whilst bad news (too cold) is likely to mean we are headed into recession. The elusive middle ground of just right seems ever harder to find.