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GILTS RALLY AS MARKETS CONSIDER THE IMPACT OF AN ECONOMIC SLOWDOWN
Data Sourced from FE Analytics, and Bloomberg Finance LP
GILTS RALLY AS MARKETS CONSIDER THE IMPACT OF AN ECONOMIC SLOWDOWN
This week saw further volatility in bond markets. August has been a very poor month for government bonds as yields in the UK and US have increased on fears that rates may go higher and remain elevated for longer. This week gilts caught a break as the bad news is good news scenario returned. The Purchasing Managers’ Indices for August show a much bigger slowdown in activity than had been forecast. The decline in services was particularly surprising given recent demand-driven inflation in many services sectors. These indices are usually much faster than official data in spotting changing trends and the PMIs show the UK and EU in contraction, and only modest growth in the US.
This allowed gilts to recover slightly as markets look at the already weak level of growth in the UK and figure it won’t take much to turn the Bank of England away from its higher-for-longer position. As ever, we should try to avoid reading too much into one month’s data, but the decline in house buyers, poor consumer confidence, and rising defaults and insolvencies also show further weakness for the UK.
GLOBAL: BONDS RALLY AFTER UNEXPECTED DROP IN ECONOMIC OUTPUT
Economic output fell sharply in developed economies last month and the composite Purchasing Managers’ Index for the UK and Europe now indicates economies in contraction. Manufacturing output has been declining for several months but output from services was expected to continue growing. Instead, services activity contracted as inflation and higher borrowing costs squeeze demand. The composite PMI reading for the US also fell sharply, although overall output growth is still positive.
UK and European government bonds rallied as investors hope central banks will refrain from further rate hikes as they wait to see if the steps they have already taken will reduce economic activity enough to curb inflation. Meanwhile there are other signs of economic stress in the UK. Business software provider Sage Group reported that small businesses have seen revenues fall by more than 20% this year, while the Bank of England has warned that higher borrowing costs will result in more businesses defaulting on their loans.
US: NVIDIA’S BUMPER SALES DRAG US STOCKS HIGHER
Nvidia easily beat expectations for second quarter sales as it announced revenues of $13.5bn. This is a big increase from the bumper sales of last quarter and is double sales for the same quarter in 2022 as it continues to benefit from demand for the advanced microchips needed for artificial intelligence. The strong performance has helped Nvidia’s shares continue their rapid rise. The wider technology sector benefited from Nvidia’s performance as stocks including Microsoft, Alphabet and Meta have also risen and this led the broad US market upwards after several weeks of declining share prices.
There were other signs of optimism this week after UK-based chip designer Arm formally announced plans to list in New York in September and US online grocer Instacart also announced plans for a stock market listing next month. However, there are signs that consumer spending is beginning to slow. Retailers Foot Locker and Macy’s saw their shares drop sharply as they announced lower sales as consumers cut discretionary spending.
EQUITIES: HOUSE BUILDERS SLIDE AS MORTGAGE COSTS PUT OFF BUYERS
House builders came under more pressure after Crest Nicholson issued a profits warning. Recent updates from building firms have been mixed, with many companies reporting falling sales but saying a resilient core of demand remains, despite higher mortgages costs. However, Crest’s update rattled investors due to the size of the downgrade and the sudden decline in buyers in the last few weeks. It revised its forecast for full year profits from £74m to £50m. Full year profits in 2022 were almost £178m. Meanwhile Persimmon will drop out of the FTSE 100 as falling sales drag on its valuation.
Crest’s shares fell more than 7% on Monday and are down around 10% this week. Its decline dragged on the wider sector, although many of the house builders have since recovered all or most of their losses from earlier this week. There was further evidence of the difficulty facing the UK’s construction industry as figures from the Insolvency Service show more than 4,000 contractors went out of business in the 12 months to the end of June.
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