MACRO AT A GLANCE
US data remain consistent with a soft landing scenario. Housing starts, industrial production and retail sales all increased in July and the Philadelphia Fed manufacturing index returned to expansionary territory in August. Japanese inflation firms further. Annual new core CPI (which excludes fresh food and energy) rose 10bps to 4.3% in July reflecting reduced discounts under the nationwide travel subsidy program as well as higher mobile phone billing costs. We expect similar strength to be reflected in Tokyo CPI inflation for August released next week. Unhelpful UK inflation signals. Headline inflation eased in July but annual core inflation remained unchanged at 6.9% and annual wage growth stood at 8.2% in June. This is the highest rate of underlying inflation among advanced economies, suggesting the rise in the unemployment rate from a cycle low of 3.5% to 4.2% in June has yet to filter through to slower wage growth and services inflation.
POLICY PICTURE
What did we learn from the July FOMC minutes? To hike or not hike? While “almost all” participants supported last month’s 25bps rate hike, “a couple” preferred unchanged policy, and others flagged “additional monetary tightening” could be required in response to “higher and more persistent inflation”. Inflation is “unacceptably high”. Despite softer core goods inflation, lower online prices, and declines in short-term inflation expectations, inflation is still too high for comfort. No recession but no acceleration either. The US economy is no longer expected to enter recession, however, Fed officials project growth in 2024 and 2025 will be below potential.
NAVIGATING FIXED INCOME
LEARNINGS FROM EARNINGS
Three key takeaways from second quarter US earnings:
1. Easing but exceeding (low) expectations. As of August 14, 457 companies many of which overlap with the US investment grade (IG)market had reported, representing 89% of the S&P 500 market capitalization. Overall, earnings eased but exceeded low expectations; 54% beat expectations by at least 1 standard deviation (above the 15 year average of 48%) and 11% of companies missed by at least 1 standard deviation (below the 15 year average of 13%).Âą
2. From recession fears to AI hopes. The proportion of US firms mentioning “recession” continues to fall from its recent peak in 2022, while the number of companies discussing artificial intelligence (AI) soared (see Chart).
3. High quality balance sheets remain healthy. Overall, we observed limited deterioration in key credit metrics for non financial investment grade (IG) companies, thereby reaffirming our constructive view on IG credit.
