Portfolio Update – September 2023

General news

•  On 02/09/2023, in August, the United States saw a rise in its unemployment rate, reaching 3.8%, which was a significant increase from July and the highest since February 2022. Despite the increase in unemployment, nonfarm payrolls grew by 187,000 for the month, slightly exceeding expectations. The labor force participation rate also rose to 62.8%, the highest since February 2020, while the total labor force size increased by 736,000. An alternative unemployment measure, which includes discouraged workers and part-time workers for economic reasons, also increased to 7.1%, the highest since May 2022. Average hourly earnings increased by 0.2% for the month and 4.3% from a year ago, slightly below forecasts, indicating some easing of inflation pressures.
• On 04/09/2023, China’s central bank, the People’s Bank of China (PBOC), has reduced the reserve requirement ratio (RRR) for foreign-exchange deposits from 6% to 4% effective September 15. This move is aimed at curbing one-sided bets against the yuan and freeing up more money for lending to support the country’s economic growth. The reduction is expected to release around $16 billion into the market and will bring the RRR for foreign-exchange deposits to the same level as in 2006. The PBOC has been taking steps to stabilize the yuan exchange rate amid concerns about China’s slowing economy and financial risks.
• On 05/09/2023, Financial markets are largely confident that Reserve Bank Governor Philip Lowe will keep the cash rate unchanged at 4.1% during his final board meeting. Economists anticipate a period of monetary policy stability similar to Lowe’s tenure for his successor, Michele Bullock. While National Australia Bank (NAB) is the only one of the four major banks predicting another rate hike during this cycle, investors are pricing in a year of no further rate hikes or cuts. Experts suggest it will take longer before the rate can be cut, signifying a rate plateau rather than a peak. The RBA will reduce the number of rate meetings to eight per year in 2024, down from the current 11.
• On 07/09/2023, The Financial Accounting Standards Board (FASB) is moving forward with the first US accounting rule specifically for cryptocurrency. Under the new standard, companies will be required to use a fair-value approach, measuring certain digital assets at their market trading value. The rule will be effective for fiscal years beginning after December 15, 2024. The FASB’s decision to include cryptocurrencies in accounting rules will make gains and losses part of companies’ quarterly income reports. This change has been welcomed by investors who allocate capital based on financial statements and is seen as reducing a barrier to broader crypto adoption in the corporate sector.
• China reported a decline in both imports and exports in August, although the drops were less severe than expected. Exports in U.S. dollar terms fell by 8.8% compared to the previous year, better than the anticipated 9.2% decline. Imports in U.S. dollar terms decreased by 7.3%, an improvement over the expected 9% decline. This marks the ninth consecutive monthly decline in imports and the fifth consecutive monthly drop in exports. While global demand for Chinese goods has decreased, there are signs of stabilization in trade with the U.S., as both exports and imports saw milder declines than in previous months.
• Saudi Arabia and Russia have announced their decision to extend voluntary oil production cuts until the end of the year, despite the recent rally in oil prices and expectations of tight supply in the fourth quarter. This move, which caught many market participants by surprise, has pushed Brent crude oil prices above $90 a barrel for the first time since November. The decision to continue the cuts is seen as an effort to support oil prices and comes amid ongoing concerns about global supply disruptions and geopolitical tensions in various oil-producing regions.
• On 11/09/2023, Alibaba’s shares dropped by 3.5% after the company announced that outgoing CEO Daniel Zhang would also step down as chairman and CEO of its cloud business. This unexpected move comes after Alibaba’s previous announcement in June that Zhang would leave his roles as chairman and CEO of Alibaba Group to focus on the cloud intelligence unit. Eddie Wu, originally slated to take over as CEO and director of Alibaba Group, will now also serve as the interim chairman and CEO of the cloud business. Zhang had been Alibaba Group CEO since 2015 and group chairman since 2019.
• On 12/09/2023, North Korean leader Kim Jong Un has arrived in Russia for a rare meeting with President Vladimir Putin, accompanied by top military officials responsible for the country’s nuclear-capable weapons and munitions factories. This meeting has raised concerns in the West about a potential arms deal for Moscow’s involvement in Ukraine. Kim’s arrival was confirmed by North Korea’s official news agency, and South Korea’s Defense Ministry assessed that his train crossed into Russia early Tuesday. Kim’s delegation likely includes his foreign minister and top military officials.
• Jamie Dimon, the CEO of JPMorgan Chase, cautioned that it would be a “huge mistake” to assume the strong U.S. economy will last for years. While the current economy benefits from healthy consumer balance sheets and rising wages, Dimon expressed concerns about potential risks. He cited central banks reducing liquidity programs, the Ukraine war, and governments globally engaging in significant spending. Dimon emphasized that economic conditions can change, and it’s unclear what the full effect of these factors will be in the coming months. He also noted that strains were emerging in parts of the real estate and subprime auto lending sectors.
• On 14/09/2023, in August, inflation in the United States experienced its most significant monthly surge this year, driven by higher energy costs and various other goods and services. The Consumer Price Index (CPI), a gauge of expenses for a wide range of products and services, saw a 0.6% increase for the month, marking a 3.7% rise from the previous year. This exceeded economists’ expectations. Excluding the volatile categories of food and energy, the core CPI increased by 0.3%, reaching 4.3% year-on-year. Energy prices, particularly gasoline, played a significant role in this uptick. Food prices rose modestly, while shelter costs, a substantial component of the CPI, also saw an increase. Notably, rent of primary residence and owners equivalent rent both experienced notable rises. The report also highlighted a surge in airfares, a decline in used vehicle prices, and a rise in transportation services.
• On 15/09/2023, in August, the U.S. producer price index (PPI), a measure of what producers receive for their goods and services, rose more than expected, registering a seasonally adjusted 0.7% increase and a 1.6% rise on a year-over-year basis, according to the U.S. Department of Labor. The monthly gain exceeded the Dow Jones estimate for a 0.4% increase and was the largest single-month increase since June 2022. However, when food and energy are excluded, the core PPI increased 0.2%, in line with estimates, and the core PPI rose 2.1% on a 12-month basis, marking its lowest annual level since January 2021. Excluding food, energy, and trade services, the PPI increased 0.3%. This data comes following the release of the consumer price index (CPI), which showed a monthly increase of 0.6% and a year-over-year increase of 3.7%. Core CPI, excluding food and energy, increased 0.3% and 4.3%, respectively. The rise in the PPI, like the CPI, was primarily driven by a significant increase in energy prices, with the PPI energy index surging by 10.5% for the month, largely due to a 20% rise in gasoline prices.
• The European Central Bank (ECB) has announced its 10th consecutive interest rate hike, raising its main deposit facility from -0.5% in June 2022 to a record 4%. This move comes as part of the ECB’s efforts to combat inflation, even as the region’s economy shows signs of weakening. The decision to raise rates appears to be driven by upward revisions in staff macroeconomic projections for the euro area, with inflation expected to average 5.6% this year (up from a previous forecast of 5.4%) and 3.2% next year (up from a previous forecast of 3%). However, the ECB has slightly lowered its medium-term forecast from 2.2% to 2.1%. Despite the rate hike, the ECB suggested that further increases may not be necessary at this time, stating that its current interest rate levels would contribute to a timely return of inflation to its target.
• In August, China’s retail sales and industrial production showed better-than-expected growth, according to data from the National Bureau of Statistics. Retail sales increased by 4.6% year-on-year, surpassing the Reuters poll forecast of 3% and exceeding July’s 2.5% growth. Industrial production grew by 4.5% year-on-year, better than the forecasted 3.9% and faster than the 3.7% increase in July. However, fixed asset investment grew by 3.2% year-on-year in August on a year-to-date basis, missing expectations for a 3.3% increase and slowing down from the 3.4% pace in July. This decline was attributed to a sharper drop in real estate investment and a slowdown in infrastructure investment, with only manufacturing experiencing an investment pickup.
• On 19/09/2023, Financial markets and economists are widely anticipating that the Bank of England (BoE) will raise interest rates by another quarter point during its upcoming meeting, bringing the cost of borrowing to 5.5%, the highest level since early 2008. This move comes after a similar rate hike by the European Central Bank (ECB) in the previous week. The BoE had given guidance that they would increase rates further if there were signs of persistent inflation, which have been evident in recent wage and cost of services data. Despite signals from some members of the bank’s Monetary Policy Committee suggesting a potential hold on rates, the prevailing expectation remains a rate increase.
• On 20/09/2023, the upcoming Federal Reserve meeting is expected to focus more on the central bank’s future actions rather than immediate policy changes. Currently, there is minimal likelihood of the Fed raising its benchmark interest rate, with markets pricing in just a 1% chance of such a move. However, the meeting will include the Fed’s quarterly update on its expectations for key economic indicators like interest rates, GDP growth, inflation, and unemployment. While the Fed is unlikely to make immediate changes to its key funds rate, there is a general belief that the central bank will emphasize the need for market participants not to make assumptions about future actions.
• The national debt of the United States has crossed the historic milestone of $33 trillion for the first time. This debt represents the amount of money borrowed by the federal government to cover its operating expenses. The increase in federal spending, which surged by approximately 50% between fiscal years 2019 and 2021, played a significant role in pushing the debt past $33 trillion. Factors such as tax cuts, stimulus programs, and reduced tax revenue during the COVID-19 pandemic contributed to the government’s increased borrowing. The debt issue is currently a focal point of a congressional standoff over a spending bill needed to fund the government in the coming fiscal year, with Republicans advocating for reduced spending while Democrats support President Joe Biden’s programs, including the Inflation Reduction Act, which is estimated to cost over $1 trillion over the next decade.
• On 21/09/2023, The Federal Reserve has decided to keep interest rates steady in its latest meeting but indicated that it expects one more rate hike before the end of the year and fewer cuts in the following year compared to previous projections. This final hike, if it happens, would bring the total to twelve hikes since the tightening policy began in March 2022. The fed funds rate remains in a targeted range between 5.25% and 5.5%, the highest in about 22 years. While the decision not to hike rates was expected, there was uncertainty about the central bank’s future direction, with indications of a more restrictive policy and a higher-for-longer approach to interest rates. The stock market responded with declines following the announcement.
• Stocks experienced a retreat on Wednesday after the Federal Reserve announced its decision to leave interest rates unchanged but indicated the likelihood of another rate hike in the near future. The S&P 500 dropped by 0.94%, the Nasdaq Composite slid 1.53%, and the Dow Jones Industrial Average lost 0.22%. The Federal Reserve’s decision to hold rates steady was widely expected. However, the central bank’s economic projections included the indication of one more rate hike before the year ends. The Fed also suggested that it would conclude its rate-hiking campaign following this increase and commence rate cuts in the coming year, although rates would remain higher for the year than previously indicated in June. The markets reacted with volatility as Fed Chair Jerome Powell provided his rate outlook. Powell stated that the central bank would proceed cautiously with further rate increases but acknowledged the need for ongoing efforts to combat inflation. Powell also mentioned that a soft landing for the economy was still possible but not his primary scenario. The markets declined while Powell was speaking and continued to fall during the final half-hour of trading.
• The Bank of England’s next monetary policy move has become uncertain following a surprising downside in the August inflation data. Prior to the August Consumer Price Index (CPI) release, the market had an 80% chance of the central bank raising interest rates by 25 basis points to 5.5%. However, the market shifted dramatically after the annual headline CPI fell to 6.7% in August, contrary to expectations of a rise to 7%. The probability of the bank maintaining rates at 5.25% surged from 20% to over 57% following the release. Notably, the core CPI, which excludes volatile items, also showed a decline, coming in at 6.2% year-on-year, down from 6.9% in July. This unexpected development has led some financial institutions, such as Goldman Sachs, to change their forecasts for the Bank of England’s upcoming rate decision, now expecting the central bank to keep its main bank rate unchanged.
• On 22/09/2023, The Bank of Japan (BOJ) has chosen to maintain its ultra-loose monetary policy and keep interest rates unchanged in light of the “extremely high uncertainties” surrounding the domestic and global economic outlook. The central bank announced that it will maintain short-term interest rates at -0.1% and cap the 10-year Japanese government bond yield at around zero, aligning with market expectations. The BOJ’s monetary stance differs significantly from that of other major central banks, which have raised interest rates over the past two years to combat rising inflation. This policy divergence has contributed to the yen’s depreciation against the US dollar, with the yen weakening by over 11% year-to-date.
• House Republican leaders have sent the chamber into recess, causing uncertainty regarding the passage of a government funding bill before the end of the month. Speaker Kevin McCarthy had been working to unite his fractured Republican caucus to avoid a government shutdown. However, earlier in the day, the House failed to pass a measure that would have set the rules for debate on a Pentagon funding bill. This failure indicated that the Republican caucus was not prepared to unite behind a bill yet, making it uncertain how the government funding situation will unfold.
• On 24/09/2023, Russia has imposed an indefinite ban on the export of diesel and gasoline to most countries, except for four former Soviet states, including Belarus, Kazakhstan, Armenia, and Kyrgyzstan. This move risks disrupting fuel supplies ahead of winter and exacerbating global shortages. Russia is a major supplier of diesel, and this ban could have significant implications for the global energy market, especially as diesel inventories are already low. In response to the news, oil prices initially jumped by as much as $1 per barrel before settling lower for the session. This development underscores the vulnerability of global energy supplies to geopolitical factors.
• On 25/09/2023,  As the deadline for a budget resolution to fund the U.S. government for the rest of the fiscal year approaches, lawmakers have made little progress, increasing the risk of a government shutdown when current spending laws expire on September 30. House Republicans have recessed, further delaying negotiations. The main obstacle to a resolution appears to be a group of Republican hard-liners in the House who are advocating for more spending cuts. The inability to reach an agreement reflects the ongoing challenges in U.S. fiscal policy decisions.
• On 26/09/2023, Senator Bob Menendez of New Jersey, who was indicted on federal bribery charges along with his wife, Nadine, claimed that hundreds of thousands of dollars in cash seized from his home by federal investigators came from his personal savings account. Menendez said the money was withdrawn from his personal savings account and kept for emergencies due to his family’s history of facing confiscation in Cuba. He also mentioned that these funds were based on income he had lawfully derived. Menendez, a Democrat, stated that he had no plans to resign from the Senate despite calls to do so from prominent New Jersey Democrats.
• Amazon has announced plans to invest up to $4 billion in Anthropic, an artificial intelligence (AI) firm, while also taking a minority ownership stake in the company. This move highlights Amazon’s commitment to advancing AI and keeping pace with competitors like Microsoft and Alphabet’s Google. Anthropic, founded by former OpenAI research executives, recently introduced its AI chatbot called Claude 2. The collaboration aims to advance generative AI, with Anthropic selecting Amazon Web Services (AWS) as its primary cloud provider. AWS customers will receive early access to unique model customization and fine-tuning features. Additionally, Anthropic will utilize custom AWS-designed semiconductors to train foundational AI models.
• On 27/09/2023, Minneapolis Federal Reserve President Neel Kashkari has expressed the view that there is nearly a 50-50 chance that interest rates will need to rise significantly to combat inflation. Kashkari suggests that the U.S. economy might be heading toward a “high-pressure equilibrium,” characterized by robust consumer spending and ongoing economic growth. In this scenario, inflation could decline but remain above the Fed’s 2% target. Kashkari emphasizes that many of the disinflationary factors observed so far are due to supply-side issues rather than monetary policy restraints. He also questions the tightness of current monetary policy, citing strong activity in rate-sensitive sectors like housing and autos. Despite some moderation, services inflation, excluding shelter costs, remains elevated, raising concerns about long-term inflation trends.
• On 28/09/2023, Oil prices have surged to their highest levels in over a year due to falling crude inventories at a key storage hub in Cushing, Oklahoma. Crude stocks in Cushing dropped to 22 million barrels in late September, near the operational minimum, which marked a significant decrease from the previous week. As a result, U.S. West Texas Intermediate (WTI) crude oil futures reached $95.03 per barrel, the highest since August 2022, while global benchmark Brent crude rose to $97.56 a barrel. These price increases are driven by concerns that further drops in Cushing inventories could impact oil supplies. Analysts predict that oil prices will remain high for the remainder of the year, especially if OPEC+ continues to limit supply.
• Trading of shares of China Evergrande Group has been suspended by the Hong Kong stock exchange. This follows reports that the chairman of the troubled Chinese real estate developer has been placed under surveillance. Evergrande’s shares last closed at 32 Hong Kong cents. This is not the first time that Evergrande’s shares have been suspended; trading was halted in March last year and only resumed in August 2023 after a 17-month hiatus. The company recently reported a loss of 33 billion yuan ($4.15 billion) for the six months ending in June, with an operating loss of 11.72 billion yuan. This comes amid ongoing financial struggles and delays in its debt restructuring efforts.
• On 29/09/2023, China’s economic rebound in September appears to have stalled, with data indicating weaker retail sales, manufacturing production, pricing power, and loan growth compared to the previous month, according to the monthly China Beige Book survey. This setback raises concerns about the country’s third-quarter growth, potentially falling short of the government’s 5% growth target. While August indicators suggested signs of stabilization, September data is expected to remain soft, potentially indicating a continued slowdown in the Chinese economy.
• On 30/09/2023, The personal consumption expenditures price index (PCE) excluding food and energy in the United States rose by 0.1% in August, which was lower than the expected 0.2% increase, according to the Commerce Department. On a 12-month basis, the annual increase for core PCE was 3.9%, matching the forecast. This indicates that the Federal Reserve’s efforts to combat higher inflation are making progress. Consumer spending also rose 0.4% on a current-dollar basis in August, down from 0.9% in July. Headline PCE, which includes food and energy, increased 0.4% for the month and 3.5% from a year ago.