Weekly Commentary: 24 July 2023 – 30 July 2023
The inflation in the UK slowed down more than expected last month with consumer prices 7.9% higher YoY. It decreased expectations of future rate rises by the BOE. However, consumer prices in the UK continue to rise at a faster rate than in most other developed economies, and market gyrations are expected as they battle with inflation. Strong retail sales in June and a better-than-anticipated economic performance in the 3 months to May will perhaps make inflation stickier.
Japan’s headline inflation rose to 3.3% in June and this was the first time that they have outpaced the US figure in eight years, This will also force the BOJ to rethink its ultra-loose monetary policy as it is the world’s only central bank with negative interest rates, and any reversal of its policies would reverberate across global financial markets. However, consensus expectations are that the BOJ is expected to keep the benchmark rate unchanged at -0.1% as import-driven price gains taper off. The Yen has also depreciated against its peers, weakening to 143 yen against the dollar on Friday.
While the developed countries are battling inflation, China are struggling with deflation. China only grew 6.3% for the second quarter yoy and this marked a 0.8% increase from the first quarter, slower than 2.2% qoq recorded in the first 3 months of the years. Unemployment rate among young people aged 16 to 24 also sets a record, at 21.3% in June. The bright spot in the economy was domestic travel as urban residents doubled their tourism spending in the first half of the year to $280billion. The government has also said it would extend property support measures, in an effort to prop up the property sector and also extended tax breaks for EV car purchases.
Stock returns were mixed over the week as observed across the following 3 indices, with the Dow Jones Industrial Average (+2.13%), S&P 500 Index (+0.70%), and NASDAQ Composite Index (-0.57%). Other notable key market indices that generated negative returns consist of MSCI World (+0.36%) & Strait Times Index (+0.91%). All S&P 500 sectors registered mixed returns last week with notable sectors – Healthcare (+3.48%), Financials (+2.96%), and Energy (+3.53%) rising more than the rest of the sector. For 2022, index returns were negative for the Dow Jones Industrial Average (-8.78%), S&P 500 (-19.44%), and the NASDAQ Composite (-33.10%).
The yield-curve remains inverted as the 10Y-2Y US Treasury spread widened to -1.02%. driven by U.S 2-year and 10-year Treasury yields rising 4 bps to 4.85% and rising 0bps to 3.83% respectively. Market sentiment also became more risk-on as the U.S. High Yield (HY) – Investment Grade (IG) credit spread widened 6 bps to 2.73% while the CBOE Volatility Index (VIX) rose 124 bps to 14.83%.
As we look towards the upcoming week, the Asia-Pacific markets exhibit a mixed outlook in anticipation of significant inflation reports. These reports include the release of the U.S. consumer price index on Wednesday and the producer price index on Thursday. On Friday, concerns over a potential interest rate hike by the U.S. Federal Reserve led to a decline in the U.S. markets, with all three major indexes experiencing a decrease.
The global REITs market’s return were mostly in the green across the numerous benchmarks. FTSE EPRA Nareit Germany Index (+7.78%), FTSE EPRA Nareit UK REITs GBP (+5.09%) and FTSE EPRA Nareit Emerging MALAYSIA Index (+2.31%) were the notable REITs that generated negative returns over the past week. Closer to home, the iEdge S-REIT Index (+0.44%) and most of its subsectors generated positive weekly returns with Data centre REITS (+4.57%), the notable sector that outperformed the rest last week. REITs generally have been affected by decreasing yield spread as interest rates surged and investors price in the possibility of reduced distributions stemming from higher financing costs. However, we do expect inflows to return to the sector given the existing attractive valuations on offer and resilience offered by the REIT asset class in light of the waning global growth outlook.
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