The IMF predicts that global growth will continue to accelerate

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Week 23/08 to 03/08

The IMF updated its global economic growth forecasts last week. This update, coming just six weeks after the initial forecast was released, is a major update. For the global economy, the IMF now predicts +4.9% year-on-year growth (yoy) in 2022 (an increase of +0.5% from the April estimate).

Within that figure, advanced economies saw the biggest growth improvements, averaging +0.8% up on estimates. Among them, the US took the biggest hit of all, as its growth forecast rose from +3.5% to +4.9%. By contrast, the IMF has kept growth forecasts for emerging markets stable, reflecting the disparity in access to Covid vaccines and the relative ability of countries to provide fiscal support to their economies. The important takeaway from the latest IMF communication is that global growth remains strong, despite near-term headwinds stemming from a resurgence of Covid in several countries.

An update on the latest macroeconomic data releases

Last week saw several major economic data releases in the US. IHS Markit US Manufacturing PMI fell to 61.2 in August, below forecasts but clearly above the crucial “50” level. which indicates economic expansion. Existing home sales increased +2% MoM in July (well above market expectations), while new home sales increased +1% (in line with expectations). The median existing home price for all home types was $359,900 in August, representing a year-over-year increase of nearly +18% and the 113th consecutive month of year-over-year gains, a very strong indication of a buoyant housing market. In U.S.A.

In China, industrial production increased by +6.4% year-on-year in July, missing expectations but remaining at a healthy positive rate. This is the lowest reading for this metric in twelve months and is likely caused by the issue of supply bottlenecks and the recent outbreaks of Covid cases in China that are holding back activity. Retail sales rose +8.5% yoy in the same month, also missing expectations but maintaining positive momentum and again likely based on the near-term impact of renewed Covid restrictions and delays in supply chain.

The IHS Markit Flash Composite PMI for the Eurozone region came in at 59.5 in August, down from 60.2 in July, but still remains well above 50, still indicating "expansion." Growth estimates showed the eurozone recovered from a technical recession (defined as two consecutive quarters of contraction) last month, when growth for the second quarter of 2021 was +2%.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI. Copyright © 2022 Dominion Capital Strategies, All rights reserved

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US economic data remains stable…

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As China steps up government intervention in its economy

In the US last week, reported retail sales fell 1.1% in July, this was worse than the expected drop of 0.3%; reflecting a shift in spending from goods to services, with cars, auto parts, clothing and online shopping feeling the pinch. Much of this decline in property spending was shifted to the hotel sector.

Bar and restaurant sales increased by +38.4% year-on-year. Some commentators expect this transition to continue, limiting growth in tangible consumer product categories; but not necessarily impacting the broader prospects for economic growth in the United States. Inflation expectations also remain subdued, with the ongoing Philadelphia Fed survey now indicating that the consensus is for inflation to hold at +2.4% per year for the next five years.

US industrial production rose +0.9% in July, beating market expectations by +0.5%, while manufacturing production increased by +1.4%. These latest data for the US point to a stabilization of the economic recovery, with a predictable turnaround in consumer spending, subdued inflation expectations and strong industrial production supporting this view.

Chinese retail sales increased +8.5% in July yoy, below expectations of +11.5%; however, they continue to have a healthy growth rate. The urban unemployment rate rose to 5.1%, a three-month high, and industrial production rose +6.4% yoy, missing expectations of +7.8%; but, again, a healthy absolute run rate.

The floods in the country at the beginning of the summer and the increase in restrictions on activity in several Asian countries, due to the spread of the Delta variant, are probably to blame for the weaker than expected activity growth rates.

Also in the news from China was the latest phase of regulatory announcements for the economy from President Xi. In the latest statements, he stressed the need to support "common prosperity" and reduce wealth inequality in China. This manifests as surprise announcements of new regulations for major sectors of the Chinese economy, with the education and technology sectors leading the way.

These latest moves of government energy into the private sector have spooked markets, with exposed sectors seeing sharp declines in share prices. This story is far from over and the Dominion investment team will be following it closely in the coming months from a risk management and investment opportunity perspective.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI. Copyright © 2022 Dominion Capital Strategies, All rights reserved

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The cards are on the table, as the recovery continues in the USA

News
Week 24/09 – 01/10

Last week there was a significant flow of news that can help inform us about the inflation outlook, monetary policy and the course of financial markets.

Inflation expectations data (survey of expected inflation over the next year) held at a series high of 4.8% for the US, after a substantial jump last month; while inflation expectations for the next three years rose to the highest level since August 2013.

The United States Senate has passed a new $1 trillion infrastructure bill, which includes $550 billion in new funding for transportation, broadband, and utilities. In addition, the Senate took an important step by passing a larger $3.5 trillion spending plan that Democrats hope to pass (albeit without help from Republicans) in the coming months. A fiscal stimulus of this magnitude that will affect the economy in 2021-2022 will support growth, but it will also be inflationary.

The latest published jobs report showed the US economy added 943,000 jobs in July, far more than the 845,000 economists had expected. The unemployment rate fell to 5.4% (below estimates for 5.7%), while, at the end of June, the number of jobs increased by 590,000 to an all-time high of 10.1 million. . Employment data is an important variable to watch, as politicians and central bankers are united in their focus on the labor market as the leading indicator for determining monetary policy.

All of the above is connected. Rising inflation and inflation expectations, fiscal stimulus that could further boost inflation, and strong US jobs data all point to monetary policy turning less accommodative sooner rather than later. That's important because monetary policy support has been very important to financial markets in the recovery from the COVID-induced volatility of 2020.

The good news for investors is that this is happening in an environment of strong positive economic growth. However, investors should be aware of the potential for increased volatility and divergent performance. Tighter monetary policy and eventually higher interest rates, buoyed by a strong economy, are good for most; but not for all stock valuations. “Hype” stocks with their valuable valuations, found across multiple sectors (Tesla, bitcoin, et al.), could be the likely victims.

Stock selection and a focus on buying quality, growing businesses, at reasonable valuations has been a good strategy in the past and will continue to be in the future, especially in a future of higher inflation and tighter monetary policy. .

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI. Copyright © 2022 Dominion Capital Strategies, All rights reserved

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