Financial markets continue to grope along the macro data and suffered losses. European markets have currently abandoned the lower supports (trading ranges). U.S. inflation rose in August for the first time since February and was even slightly higher than expected in the core (+0.3% vs. +0.2%). Transportation prices provided upward pressure and the renewed strong increase in energy prices is losing its anti-inflationary effect due to the base effect - energy prices have risen between 20-40% since mid-year. Meanwhile, a reversal of upward pressure in oil and gas is not in sight. OPEC+ nations have cut production and are obviously not interested in lower prices. Moreover, since the Ukraine war, many emergency reserves are still waiting to be replenished. Despite net-zero efforts, there is a long way to go to become independent of low-cost fossil fuels. The world's dependence on this form of energy is enormous, and demand is likely to continue to rise, especially as developing countries become more affluent (see FOCUS). As expected, the U.S. Federal Reserve (FED) did not raise interest rates. However, the message that rates will remain high for an extended period of time to keep inflation moving toward the targeted 2% was clear. The FED's interest rate forecasts also signal a potential rate hike in November. Surprisingly, the economic forecast for 2024 has been increased. Based on the forecasts, the central bank expects a soft landing - a scenario that is currently booming: Poll ratings or Google searches for the term are higher than ever. In Switzerland, the SNB has surprisingly left the key interest rate unchanged, which has significantly weakened the franc. The majority of economists had expected an increase of 0.25% points. However, SNB President Thomas Jordan stressed that the fight against inflation is not over yet and that in December it will be reviewed again whether a further tightening of monetary policy is necessary. Inflation in Switzerland currently stands at 1.6% and is thus within the SNB's target range of 0 to 2%. However, rising rents and energy prices could spur inflation again. In a similar surprise, the Bank of England (BOE) refrained from a further rate hike due to easing price pressures. In the euro zone, meanwhile, the risks of stagflation are becoming more obvious, and with this fear in mind, the ECB raised its key interest rate for the tenth time in a row by 0.25% to 4%. The interest rate peak thus should also be reached by the European Central Bank by now. The latest data on inflation from Germany gave some relief. Overall, however, prices remain uncomfortably high. Driving forces, be it climate change and increasing deglobalization, are likely to continue to support inflationary pressure in the future. This is also increasingly a burden for the Swiss economy, with real GDP for the second quarter at 0%.
Global equity markets lost between 2-5% in local currency terms in September, living up to the reputation of being a seasonally weak month. Thanks to the very weak Swiss franc, many markets were less strongly negative in CHF terms. The contrast was particularly high in the USD market - the strong USD cushioned falling equity prices also for Swiss investors (S&P 500 in CHF -1.4%). Expectations for the 3rd quarter earnings season are not high. US earnings are expected to decline for the fourth consecutive quarter (-0.2%). However, with a 12-month horizon, analysts on average expect higher prices. The average price target for the S&P 500 is seen at around 5,150 points, with the technology sector seen as having the greatest potential. As before, it is astonishing how little breadth there is in the US market. The US equity market (S&P 500 Equal Weight) is up only 2% since the beginning of the year and at times flirted with the 0% mark. The Swiss stock market lost around just under 1.5% in September and is thus only up 2.2% before dividends in the current year.
The sharper-than-expected rhetoric from Federal Reserve Chairman Jerome Powell sent the bond market into a veritable panic. Yields on 10-year government bonds reached levels last seen in 2007, bringing the yield curve somewhat out of deep inversion. A steepening of the curve via the sell-off of long-term bonds is usually interpreted as meaning that inflation expectations are rising and thus, at best, anticipating further interest rate hikes. Investors thus demand a more positive real yield as compensation for holding government bonds (currently around 2% net of inflation expectations), which should be viewed in the context of renewed increases in energy prices as well as the "soft landing mantra." Other factors that make government bonds look unattractive is the spendthrift U.S. government already mentioned in the last commentary. This is accumulating deficits that would normally only be observed in a state of war or recession. In terms of positioning, record short positions of hedge funds can currently be observed, and in return, asset managers are also increasing investments in bonds to an extent rarely seen. Global bond markets are thus on track to post their third negative year, after 2022 was already the worst investment year ever for bond investors, even when looking at 250 years of history. Two consecutive negative investment years are already uncharted territory for the bond market in recent history (since 1973), and now a third may be coming. As an investor, you have made no money in the broad U.S. bond market over the last 7 years, including coupons, and that is without taking into account the rate of inflation over that period. Under the surface, corporate bankruptcies in the U.S. are on the rise. The 4-week moving average of bankruptcy filings has reached levels in the U.S. that were only seen in 2008 or 2020. The Japanese bond market has not been immune either - in the third quarter it posted a 3% loss, one of the biggest losing quarters since 1998, forcing the Bank of Japan to intervene again.
The oil price gained almost 30% in the past quarter. Massive cuts by OPEC+ have helped. The cuts announced by OPEC+ are the highest outside a recession. Certainly, it doesn't help the current incumbent in the US if voters at the pump have to bear the increased costs. The USD was strong across the board, gaining against all currencies.
Increasingly, signs are emerging that seem to confirm the recessionary expectations. The consensus of the "soft landing" is overwhelming, and wherever there is a high degree of unanimity, caution is often warranted. This is even more true at a time when equity market earnings yields are in close competition with "risk-free" government bond yields. The high level of government debt and the lack of fiscal discipline appear to be causing increased concern, which has been reflected, among other things, in rising bond yields. In September, the risk premium between Italian and German government bonds climbed back above 2% to its highest level since March. Rising energy prices and falling growth expectations are again fueling stagflation fears. We expect volatility in the bond market to persist for some time and to create uncertainty among investors accordingly. The lagging effects of monetary tightening are likely to gradually become apparent. Emblematic of this are rising delinquencies in private credit card debt or weakness in bank stocks (KBW Bank TR Index -20% for the current year), as well as the broad U-6 unemployment rate in the US. These are familiar reminders of the medium-term trajectory. We remain defensive based on our strategically cautious view.