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September 4, 2023 - Back to school, with cooler macro data (and weather).

After a rather warm August, vacationers are returning to their base in a much cooler environment. The investment community is also watching in the last few weeks incoming macro-economic data which show that the global economy is exhibiting signs of a faster deceleration than before. This "cooling-down" of the economies is fundamental for inflation to move down faster and eventually approach the central banks' targets and is now becoming more evident. As we have mentioned several times, a higher unemployment, higher expenses in order to maintain the same standard-of-living and a much higher monthly cost to service mortgages and other loans should and will eventually hurt demand for goods and services. As supply-side issues have been largely resolved, a significant drop in demand is now necessary for consumer goods and services' prices to stabilize, if not fall.

August Eurozone headline inflation was unchanged at 5.3%, above consensus expectations of a small decline from the previous month's reading of 5.1%. As expected, the key driver was a rise in energy prices. But the decline in core inflation, after an unchanged print in July, was encouraging, as it was announced at 5.3%, down from 5.5% in July. The drop was in equal parts driven by declines in goods and services inflation, which is positive, as services inflation is stickier and harder to move down fast. Consumer goods' prices seem to have already stabilized and prices have even dropped for some categories compared to last year (electronics, used cars and other). With core and headline inflation above 5%, it is perhaps early for the ECB to stop raising rates. But given the deceleration of economic activity recently and the fact that Germany is already in technical recession, it is safe to assume that one more hike until the end of the year should be the maximum delivered by the ECB.

We received fresh confirmation that the US labor market is weakening further. The July JOLTS jobs openings number fell to 8.8mn, a whopping 300k from the previous month and almost 600k below expectations. Make no mistake, the 8.8mn is still a high number of jobs waiting to be filled, but it is the lowest in almost 3 years. The August non-farm payrolls were announced at 187k, which was slightly better than the 170k forecast, but most importantly there were 110k jobs taken out of the data for June and July, through downward revisions. The unemployment rate shot up to 3.8%, from 3.5%, which is the highest level in more than 1.5 years. Of course unemployment below 4% is still a rather low number, but we are most interested in the trends at this stage. And the trend is clearly for unemployment to move higher as labor force participation is also moving higher, or in other words more people are coming back from early retirement (or pandemic-related relaxation), looking for jobs.

US 2nd quarter GDP was revised down to 2.1% in the second release of the first quarter data, while expectations were for it to remain unchanged at 2.4%. Looking in the details though, the story remained little changed. Real spending on services accounts for half of the quarterly growth and residential investment continues to contract. But as recent indicators in the services industries have indicated a slowing down of activity, GDP growth is expected to materially decelerate in the coming 6 months, provided that manufacturing and the housing market remain subdued.

The Chinese central bank took more measures to help stabilize the real estate market. First, for cities with purchase restrictions, the national minimum down-payment ratios for first and second-home buyers will be lowered by 10pp to 20% and 30%, respectively, in line with the levels of cities without purchase restrictions. Second, the national minimum mortgage interest rates for second-home buyers will be lowered by 40bp. These are important measures and beyond the actual effect on buyers, they send a clear message to Chinese people that the authorities will not let the property market move further down, at least not significantly. Without implying that the measures taken so far will ignite a strong recovery, we could conclude that the worst in the sector could be behind us.

Equity markets rebounded for a second week, with the help of Tech-related companies and sectors. Nasdaq moved higher by 3% while European bourses rose by only 1% on average. Chinese equities posted a weekly gain of 2.5%, after the recent measures taken by the local authorities to boost sentiment on the stock market and help the real estate market. In terms of sectors, the defensives continued their under-performance with Consumer Staples (which includes companies in the food&beverages sectors as well as household products etc) posting zero gains, with Healthcare and Utilities showing a similar performance. We find it very interesting and of course not sustainable that in a period where the maro-economic data are cooling significantly and pointing to a slow down in economic activity, defensive sectors are not bought by investors. This will eventually change and we find opportunities to buy some stocks currently trading the cheapest they have been in more than 5 years (Heineken, Pernod Ricard, Roche, Deutsche Telekom for example).

Bonds had a volatile week, but finished almost unchanged. The weak macro data pushed bond prices higher (and yields lower), but there was a big reversal on Friday afternoon, to make things look almost unchanged for the week. The short-end of the curve did much better as the 2-year US bond held its gains and the yield finished at 4.90%, lower by about 20bp from the high of 5.10%. The 10-year is still close to its recent high of 4.25%.

Chart of the Week : Will September "live up to its name", as August did ?

The above chart/table compiled by Pictet shows the average returns of the S&P500, per month, since 1990. Of course, these are just statistics and should not be considered as a method to make investment decisions. Having said that, history does influence the collective mind of investors, who usually enter September with less conviction to buy , rather they wait for things to evolve. It is only natural that markets are a bit "skeptical" in September, as it is usually the period where analysts are refreshing their models and earnings estimates revisions usually take place for the following year. Downward revisions, if they were to take place, they will be announced in the next few weeks. August is another month that traditionally is not good and this year was no exception. With the main indices already being about 15% until now, an August correction was only a natural event. It would be interesting to see what the last stretch of the year will bring to equities, at a time when the effects of one year of aggressive interest rate hikes will start to show in the economy. On the positive side, after one month we will be entering the best quarter for equities, with the market being up almost 75% of the time.


• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : Pictet, Cover photo:


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