Market Update 17th July 2023

Beyoncé boost

Beyoncé has crept into economists’ interest more recently for reasons beyond her musical talents. Sweden’s recent high inflation spike was linked to (blamed on) Beyoncé’s tour appearances and the rise in hotel and restaurant prices around that time.

China could do with a bit of a ‘Beyoncé boost’, and maybe China’s State Council will be seeking to book her in for some Tour dates.  As Jim mentioned last week, the Chinese June Consumer Price Index was flat year on year and down 0.2% month on month, the fifth consecutive decline. The Producer Price Index registered a decline of -5.4% year on year. China is starting to look like it’s becoming a substantial exporter of deflation once again.

We also had the latest US Consumer Price Index numbers reported by the Bureau of Labor Statistics last week. Headline inflation is now running at 3%, its slowest pace since March 2021. Core inflation, which excludes food and energy prices recorded a gain of only 0.2% for the month of June, the smallest increase in nearly two years. The drivers of US inflation have switched from energy and goods to housing, and in particular, what the US calls owners’ equivalent rent, or OER. Digging slightly deeper, this makes up an impressive 25% weighting in the CPI calculation, and is something that no one actually pays. The OER is calculated from survey responses to the question “if someone were to rent your home today, how much do you think it would rent for, monthly, unfurnished and without utilities?”. Without this, and measured in the same way as European inflation, the US rate would be even lower.

Furthermore, as the analysis of Absolute Research Strategy suggests, the US Manufacturing and Services ISM prices paid data can be a good lead indicator of Headline CPI inflation, and the most recent numbers are pointing to further declines in inflation from here too. Let’s see if the upcoming Steely Dan Tour has a similar ‘Beyonce boost’ to US inflation?!

The accepted wisdom is that this is all well and good, but not fast enough for the Fed, and certainly not good enough for there not to be a rate rise at the next Fed meeting later this month – remembering the FOMC has a holiday the following month so will want to be ahead of the game.

Let’s now take a quick look at equity market valuations. As JP Morgan’s Equity Strategy points out ”The market ex Tech/AI is far from priced for disappointment. The 12 month forward Price to Earnings (P/E) multiple for the S&P500 is currently at 19.4x. Tech at 27.3x and non-Tech/AI part, the remaining 65% of the index, at 17.4x. This compares to 15.3x historical median, a 10%+ premium. At the low last October, when recession was the base case for most, S&P500 was trading at 15.3x forward P/E, with Tech at 18.1x and SPX ex Tech at 14.5x. Importantly, these P/E multiples are based off forward earnings which are generally near all-time highs.” We will be watching closely how the market digests the upcoming earnings reporting season.

Moving to credit, we had an interesting catch up with Peter Harvey, manager of the Schroders Strategic Credit Fund. We talked a bit about the current market environment. He highlighted the yield spread between BB credit (just below investment grade) and Government Bonds was about 3.5% currently, which means it sits in the 2^nd quartile of attractiveness, based on historical spreads. So whilst reasonably attractive, they are still a bit defensively positioned, waiting for further opportunities, particularly if it widens to above 4%.

Simon Reynolds – Head of Research

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