Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.
Eurozone Market Update
Eurozone inflation eased to 2.2% in August, the lowest in three years, down from 2.6% in July. Core inflation dipped to 2.8%, influenced by weaker energy prices, while services inflation rose to 4.2%, raising concerns for the ECB. Germany’s harmonised inflation fell to 2.0%, France’s to 2.2%, and Spain’s to 2.4%, boosting investor confidence in further ECB rate cuts. ECB officials discussed potential rate moves, with Governor Klaas Knot emphasising the need for more data before deciding on a September cut. The euro area’s flash composite Purchasing Managers’ Index (PMI) entered expansionary territory at 51.2. On a sector level, services PMI rose to 53.3 from 51.9, but manufacturing PMI was still dragging at 45.8. France’s composite PMI jumped 3.6 to 52.7, with services PMI up to 55.0, a two-year high following the Olympics boost. However, there is still a significant drag in Germany, which recorded a composite PMI of 48.5.
Source: Bloomberg, data as of 30 August 2024
UK Market Update
Annual UK headline inflation rose to 2.2% in July, while core inflation fell to 3.3%. Services inflation unexpectedly dropped to 5.2%, raising to 42% the probability of a 25 bps rate cut at the BoE’s September meeting. However, we still expect the next cut to be in November, as the subsequent inflation and labour prints fall before the September meeting. The labour market showed resilience, with unemployment down to 4.2% and wage growth slowing to 5.4%. GDP grew by 0.6%, while PMI figures for August indicated stronger-than-expected growth. This more robust growth, coupled with the rise in private sector output and the fast pace of employment growth, could concern the more hawkish members of the BoE, who have highlighted the upside risk of inflation if growth remains strong, making a case for a pause at the next monetary policy meeting.
Source: Bloomberg, data as of 30 August 2024
US Market Update
The US labour market was perceived as weak in July, with non-farm payrolls increasing by just 114,000 and private payrolls rising by 97,000, both well below expectations. The unemployment rate edged up to 4.3% from 4.1%, driven by an increase in the participation rate. Despite Fed Chair Jerome Powell explicitly pushing back on the notion of a 50 bps rate cut, the disappointing job figures fuelled speculation that the Fed may have to cut rates at all remaining meetings this year and consider a 50 bps cut if the data continues to weaken (see Chart of the Month). Meanwhile, annual inflation slowed to 2.9% in July, and core inflation dropped to 3.2%, the lowest since 2021. Second-quarter GDP surprised with a 3.0% annualised growth rate, exceeding the 2.8% forecast.
Source: Bloomberg, data as of 30 August 2024
Looking Ahead
After the Fed’s July meeting emphasised labour data in future policy decisions, August’s weaker-than-expected jobs report prompted markets to drastically revise their expectations. Market participants swiftly shifted from a soft landing narrative to predicting a severe recession, with some forecasting multiple 50 bps rate cuts by the Fed. We believe the market overreacted; the labour data was not as weak as perceived. While we agree the Fed will cut rates in September, the overall economic picture does not justify cutting in larger increments. Our projections for the BoE, ECB, and Federal Open Market Committee are close to market expectations, but we reject the notion of an aggressive, front-loaded easing cycle. While economic data could deteriorate sharply, justifying more aggressive cuts, this is a low-probability scenario. Paying close attention to the broader array of economic data and its momentum is vital in the coming months for any changes to these outlooks.
Chart of the Month
Source: Bloomberg as of 30 August 2024
IMPORTANT INFORMATION
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors.
The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust Asset Management’s (NTAM) and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2A of the Form ADV or consult an NTI representative.
Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over-compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of NTAM.
This information is intended for purposes of NTI and/or its affiliates marketing as providers of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NTI and/or its affiliates are not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. NTI and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing and other services rendered to various proprietary and third party investment products and firms that may be the subject of or become associated with the services described herein.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, , Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
© 2024 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.
