Powering On

In July 2023 the market moved further towards a 'Goldilocks' sweet spot.

Figure 1: The Economic Pulse

Figure 2: Stock Market Movement Scale

Optimistic Drivers

Goldman Sach’s US recession call, dropping from 25% to 20% in mid July, which encouraged the market.

 Chart 1: Probability of US Recession, Wall Street Journal, Goldman Sachs Global Investment Research

The US inflation numbers further fueled optimism with a smaller increase than expected for June (to 4.8% vs the expected 5%).

Chart 2: US CPI Jun23. Haver Analytics, Goldman Sachs Global Investment Research

…even to showing signs of a quickened pace of disinflation and being back on track by 2025.

Chart 3: US Pace of Disinflation. Haver Analytics, Goldman Sachs Global Investment Research

Australia followed suit with a smaller than expected increase in June CPI. The 12 month CPI only rose 6%, marking a second consecutive lower CPI reading since its peak of 7.8% in Dec 2022.

Chart 4: CPI, Australia, quarterly and annual movement (%). ABS

Falling unemployment rate is supportive of sustained savings and personal spending on goods (helping economic activity to remain resilient).

Chart 5: US Labour Market. Atlanta Federal Reserve, BLS, FactSet, J.P. Morgan Asset Management. Guide to the Markets – Australia. Data as of 04/08/23.

Unemployment rates are now at historic lows, not just in the US, but Euro and Australia as well.

...and expected to remain low.

Chart 6: Unemployment Rates. Mason Stevens, Macrobond, ABS, CNBS, Eurostat, BLS

US households had been less affected by the increase in mortgage rates and its level of disposable income to servicing loans had been good.

Chart 7: US household debt. Bloomberg, BEA, JPMAM, Jun23.

Many reasons to be cheerful, but markets are always vigilant to what can potentially go wrong.

What Could Go Wrong?

Perhaps the consumer slow down hasn’t bitten yet? There is always a time lag between what the market expects and when they actually happen. Personal consumption has dialled down a little in July.

Chart 8: Timing of expected consumer slowdown. Haver Analytics, JPMAM, Q2 2023.

US household excess savings is expected to run out in 2024 and as noted in the blue line of Chart 5 above, the rate of wage growth is also decelerating.

Chart 9: US household excess savings. J.P. Morgan, April 2023.

US economics is not all out of the woods yet. Its Economic Leading Indicator (left bar) is still low and red flagged.

Chart 10: US Economic Indicators. Conference Board US, FactSet, Institute for Supply Management, US Department of Labor, J.P. Morgan Asset Management. Data as of 04/08/23.

… the weaker growth scenario for the next 6-9 months (as depicted by the brown dots of Chart 11) is still on the cards.

Chart 11: Leading economic indicators. Conference Board, JPMAM, June 2023.

Powering on… but with one foot clinging onto the brakes and an eye focused on corporate earnings' speed bumps.

China

The deep fall in China’s property market and the continued lack of life despite numerous stimulus.

Chart 12: China's Property Market. National Bureau of Statistics China, J.P. Morgan Asset Management. Date as of Jul 31, 2023.

Investment sentiments and corporate confidence in China are now dragged lower.

Chart 13: China's Credit Impulse

These have created much havoc for ASX resource stocks in August like those exposed to iron ore (BHP, RIO) and lithium (IGO, MIN).

Options Corner

Here are some options strategies executed for clients that are now buffering the current "battering" experienced by the market:

• The September '23 expiry Bear call spread on the index: Shorted the XJO (S&P/ASX 200 Index) strike of 7400 whilst simultaneously longing the 7500 strike for protection. Executed with XJO at around 7300 (last at 7200). With the fall on the Index, the position is now profitable.
• Bought shares and wrote September '23 call options on RIO with the strike of $113.15, for the receipt of the hefty August dividend of $3.84 plus an equally hefty call premium of $3. With current weakness, share price has gone slightly below the strategy breakeven point, but has definitely created some cushioning comfort for investors. Next, we are aiming to sell put options for the ride back up.

Important: For sophisticated investors only. This is not a recommendation to trade options. Note Disclaimer below and the ETO Target Market Determinant document.