Good morning,


Markets continued on their recent upward trajectory last week, further paring losses for the year so far. For example, the NASDAQ is now up 22% from its 2022 low. Last week, US inflation data (more details below) was well received by investors who are now wagering that the Fed won’t tighten as aggressively. This may well materialise, but there are some cautionary points to note. Inflation may have now peaked, but remains elevated versus history, and significantly higher than the prevailing headline policy interest rates on both sides of the Atlantic.


In the US, the Fed stated that it would need to see ‘clear and convincing’ evidence that inflation is easing before it would amend the current path of higher rates. History tells us that rates usually have to intersect with the inflation rate to put a cap on prices. Further insights into the mindset at the Federal Reserve will be available from the latest Fed minutes which are released on Wednesday.


In the immediate short term, such large upward moves are unlikely to be sustainable (unfortunately markets cannot gain 10% each and every month). Whether the moves since late June are a ‘bear market rally’ or something more constructive remains to be seen.  At Zurich, we are keeping an open mind and a flexible approach to asset allocation.


If you have any questions, please do get in touch.


Weekly Investment News


Equities rallied as key inflation data points in the US came in lower than expected. All 11 major sectors were higher as small cap stocks outperformed large caps. The headline figure for the US consumer price index came in flat in July and saw the smallest monthly change since May 2020. A steep decline in fuel prices was the major driver. However, food inflation remains stubbornly high with the 12 month change of 13.1% the highest since the 1970s. The producer price index in the US saw its first fall in the headline number since April 2020, with the 12 month increase for July falling back to 9.8%.


The immediate reaction was swift with growth stocks, whose valuations tend to be more rate sensitive, outperforming as the market lowered its expectations in relation to the Fed September meeting, now seeing a 0.50% rate increase as opposed to 0.75%. However, a number of Fed officials sounded caution last week refusing to signal a ‘victory’ over inflation. The lower Fed expectations coupled with a general ‘risk on’ attitude saw the US dollar weaken against most currencies.


Within the eurozone, industrial production rose for a third consecutive month, coming in stronger than expected at 0.7% over the month vs an estimate of 0.2%. The severe drought being experienced across central Europe is forecast to hit economic activity throughout August. For example, the low level of the Rhine looks set to see the restriction of industrial cargo on the integral river network. In the UK, GDP fell 0.6% in July, although this was better than the consensus forecast of -1.3%. The Bank of England are now publicly stating that they expect a recession before the end of the year.



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