Monthly market commentary for July 2023.
The economics of optimism
Global equity markets maintained their upward trajectory in July 2023, bolstered by generally positive economic data, as well as investors’ optimism that the Fed may be able to curb inflation while piloting the economy to a soft landing. Emerging markets outperformed developed markets during the month.
The Pacific ex Japan region was the top performer among developed markets in July, bolstered mainly by strength in Singapore. The Nordic countries lagged the overall market due to weakness in Finland. Africa led the emerging markets during the month, benefiting from strong performance in South Africa and Senegal. The Gulf Cooperation Council (GCC) countries–Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates–were the primary laggards among the emerging markets in July, hampered largely by underperformance in Oman.
As widely expected, the Fed increased the federal-funds rate by 25 basis points (0.25%) to a range of 5.25%- 5.50% at its meeting in late July after pausing in its rate-hiking cycle in June. In a statement announcing the increase, the Federal Open Market Committee (FOMC) reiterated its commitment to reduce inflation to its 2% target rate and commented that it would “adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.” The FOMC also noted that the members “will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments.” At a news conference following the release of the rate-hike announcement, Fed Chair Jerome Powell said, “We can afford to be a little patient, as well as resolute, as we let this unfold. We think we’re going to need to hold, certainly, policy at restrictive levels for some time, and we’d be prepared to raise [interest rates] further if we think that’s appropriate.”
Global fixed-income assets saw mixed performance in July. Canadian bonds generally slumped, as corporate debt outperformed federal and provincial debt. Meanwhile, U.S. high-yield bonds registered positive returns and were the top performers within the U.S. market for the period.
Global commodity prices generally moved higher in July. The West Texas Intermediate (WTI) crude-oil spot price and the Brent crude oil price gained 15.8% and 13.3%, respectively, in U.S. dollar terms, amid expectations of dwindling supplies due to production output cuts from the Organization of the Petroleum Exporting Countries (OPEC). The gold spot price was up 4.1% for the month due to weakness in the U.S. dollar and investors’ speculation that the Fed may pause its rate-hiking cycle at its meeting in September. Following a sizeable upturn in June, the New York Mercantile Exchange (NYMEX) natural gas price declined 5.1% in July after the International Energy Agency (IEA) estimated that demand for natural gas in Europe will fall 7% for the 2023 calendar year. The IEA attributed its forecast to lower consumption in the power sector and rapidly expanding renewable energy-generation.
Wheat prices climbed sharply in mid-July after Russia withdrew from an agreement to export Ukrainian grain through the Black Sea. The plan had authorized Ukraine to export roughly 33 million metric tons (36 million tons) of food by sea since August 2022. More than half of the exports were being delivered to emerging markets. The U.S. and its allies condemned Russia’s pullout from the agreement. U.S. Secretary of State Anthony Blinken stated, “The result of Russia’s action today weaponizing food, using it as a tool, as a weapon, in its war against Ukraine, will be to make food harder to come by in places that desperately need it.” The wheat price subsequently fell later in the month amid some profit-taking by investors and as more grain flowed out of the country via land routes and the Danube River. The wheat price ended the month with a 2.3% gain.
In contrast to inflationary worries in most global economies, there are concerns that China may be experiencing a bout of deflation. According to the National Bureau of Statistics of China, the nation’s consumer-price index (CPI) dipped 0.2% in June, and was flat compared to the same period in 2022. Food and consumer goods prices were down 0.5% and 0.3%, respectively, for the month. The 2.0% year-over-year increase in costs for food, tobacco and liquor was offset by a 6.5% decline in transportation and telecommunications prices. Additionally, China’s producer-price index (PPI), which tracks the average change over time in selling prices received by domestic producers of manufactured goods, declined 5.4% year-over-year in June. Prices for the mining, raw materials, and processing industries fell by 16.2%, 9.5%, and 4.7%, respectively, during the previous 12-month period.
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