Financial update from Brewin Dolphin - 1 September 2023

September 2023

The Weekly Round-up

Friday 1 September 2023

In his weekly round-up, Guy Foster, Chief Strategist, discusses new US jobs data and Chinese property sector policy changes.

August came to an end with an equity rally, meaning that a rare down month for stocks in 2023 ended up only seeing modest losses. Bonds under-performed during the month as well. Long-term interest rates rose as investors first fretted over a more hawkish potential tone that might come from the Kansas City Federal Reserve’s Jackson Hole Economic symposium. Fed Chairman Jay Powell’s speech divided commentators. The tone was hawkish, but there was a distinct lack of commitment to future policy-tightening action. Chairman Powell will hope that the hawkish tone will prevent market-based inflation expectations from rising. If they do rise, it will put pressure on the Fed to raise interest rates further. He does not want to do this unless necessary, as it would increase the risks of a recession.

It seems fair to conclude that the Fed will be watching data very closely as it attempts to gauge whether it has taken enough action to slow US inflation.

A decline in employment would be the strongest indicator that the US economy is heading into a recession. So far, the labour market has been the source of the economy’s strength, miraculously finding new hires despite surveys and anecdotal evidence showing a massive shortage of candidates. But over several months we have seen the labour market easing somewhat.

This week, we saw more evidence as the number of people quitting their jobs declined, as did the number of job openings that needed filling. But the number of outstanding jobs is still high, which seems to be supporting the employment market. Jobless claims have declined, and new jobs growth continued to increase at a healthy pace in August. The most closely watched indicator, the non-farm payroll report, showed that the economy created 187k new jobs during August, with the strongest manufacturing employment growth in ten months.

The unemployment rate rose, but this was partly good news because it reflects more people looking for a new job, rather than just people having lost their old job. But there has been an increase in layoffs as well, which is to be expected as the labour market eases.

With wage growth also being relatively soft, this seems like a very market and policymaker-friendly employment report. It suggests that inflationary pressures are ebbing and while the growth environment is also softening, jobs growth is positive and will support future consumption.

The same is not true for China. The weakness of the economy continues to weigh on industrial metals but there were some green shoots, suggesting that parts of the economy might be recovering. In fact, we suggested that the extreme weakness in renminbi was a factor that should support Chinese manufacturing in the fullness of time. So it is proving to be, with a modest uptick in both the main gauges of manufacturing activity and new orders expanding.

Manufacturing, though, is heavily influenced by global demand and the exchange rate. China’s problem is domestic demand, and how to increase it without directing more debt-funded spending at wasteful real estate and infrastructure activity. Having correctly diagnosed the problem, the Chinese Communist Party is now attempting to deflate the real estate bubble without undermining growth, living standards and, above all, employment. It has had limited evidence of success.

In terms of policy actions, there have been a number designed to underpin demand for property from those wishing to buy a home to live in (president Xi Jinping disapproves of buying a property for speculation).

To that end, a personal tax rebate was allowed for households upgrading their apartment. Homeowners were entitled to smaller downpayments on mortgages as long as they did not already own a current home (previously, they would have been disqualified if they had ever owned a home). Mortgage interest rates will be renegotiable for first-time buyers later this month.

A cap has been imposed on real estate commissions. Private equity funds have been given permission to raise money for residential property developments. Measures have also been taken to allow developers greater access to funds to try to restart stalled housing projects.

Investors remain unconvinced about these measures though. Many seem relatively modest. A brief breakout from the current long-term downward trend in July came to nothing. Sentiment is very depressed. Quite exceptionally, investors are questioning whether one of the largest economies in the world is worthy of investment at all.

The weakness of the Chinese economy really weighed on mining stocks. However, there were positive gains to be made from stocks in August. The energy sector benefited from a rising oil price. This in turn will pose something of a threat to the US economy as rising gasoline prices will offset the more modest levels of wage growth now being seen, reducing consumers’ disposable income and ultimately weighing on growth.

So, while today’s US jobs report contained many positive features, the economy’s growth potential remains limited, and a relatively cautious investment stance remains valid.

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