Eastspring Investments
5 min read
Summary
While the Fed has room to ease policy to engineer a soft landing, a deeper slowdown may emerge if the Fed acts too late.
Market update
Equities: Global stock markets rose 2.6% in August despite a sharp correction early in the month which was triggered by a combination of factors, including the unwinding of Yen carry trades, poor US manufacturing data, US recession fears, and worldwide political unrest. The correction was short-lived, with markets eventually recovering on the back of easing US inflation, rate cut hopes, and renewed carry trade interest. Developed Market (DM) equities gained 2.7%, outperforming Emerging Market (EM) equities which rose 1.6%. Within DM, Europe led with a 4.0% gain while US equities rose 2.4%. ASEAN markets outperformed with a robust 8.1% increase, outpacing both the broader Asia Pacific ex Japan (2.4%) markets and EM. MSCI China gained marginally, up 1.0%.
Fixed Income: Global bond markets rallied in August, as easing inflation and a slowing US labour market supported the case for a potential rate cut by the Fed in September. Fed Chair Jerome Powell's speech in Jackson Hole indicated a shift towards a more relaxed monetary policy from September. Global aggregate bonds returned 2.4% while US Treasuries gained 1.3%. The US 10-year Treasury yield fell 18 bps to 3.91%. US investment grade bonds and US high yield bonds produced positive returns of 1.5% and 1.6%, respectively. EM debt fared well, up 2.3%, supported by falling US Treasury yields and a weaker USD.
Macro overview
Growth: TThe J.P. Morgan Global Composite Purchasing Managers Index (PMI) Output Index has remained above a “50” reading for ten consecutive months, indicating still positive global economic expansion. Weakness in the manufacturing sector persists in the August data, though this is somewhat offset by a still strong service sector. Economic data across most key regions are below expectations, reflecting general economic softness. In our view, global growth momentum is decelerating. A weaker US labour market will likely limit wage growth over the longer-term, a key source of US consumer spending. US demand, which has been a key driver of global growth, will thus slow down further.
Inflation: In August, the headline US Consumer Price Index (CPI) rose by 2.5% y/y compared to the same period last year, down from July’s 2.9% y/y. August’s inflation reading represented the lowest annual increase since February 2021. However, prices of shelter and other services remain sticky. We continue to track labour market conditions and wage trajectories for inflation risks. While supply-side inflation risks could arise due to geopolitical tensions (i.e., a deepening of the Middle East conflict), for example, we expect inflation to trend towards the Federal Reserve’s (Fed) 2% target, as a weakening US labour market dampens overall demand and the US economy.
Monetary Policy: Given softer headline US inflation readings in recent months, the Fed and the markets are likely to focus their attentions on the labour market. Given that maximum employment is the other component of the Fed’s dual mandate, the pace of rate cuts will likely depend on how quickly the US labour market weakens, among other factors. While the Fed has room to ease policy to potentially engineer a “soft landing”, a deeper slowdown may emerge if the Fed acts too late.
Please download report for a discussion on key risks.
Singapore by Eastspring Investments (Singapore) Limited (UEN: 199407631H)
Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws
Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.
Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).
Malaysia by Eastspring Investments Berhad (200001028634/ 531241-U) and Eastspring Al-Wara’ Investments Berhad (200901017585 / 860682-K).
Thailand by Eastspring Asset Management (Thailand) Co., Ltd.
United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.
European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.
United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.
Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.
The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.
The views and opinions contained herein are those of the author, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this document is at the sole discretion of the reader. Please carefully study the related information and/or consult your own professional adviser before investing.
Investment involves risks. Past performance of and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.
Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.
Eastspring Investments companies (excluding joint venture companies) are ultimately wholly owned/indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments companies (including joint venture companies) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company Limited, a subsidiary of M&G plc (a company incorporated in the United Kingdom).