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Our views 18 March 2024

JP’s Journal: I’m with Jamie

5 min read

It was not a great week for bond investors as data was generally unhelpful. US February Consumer Price Inflation print came in line with expectations at 0.4% but the core measure was 0.1% above consensus and Bloomberg’s calculation of super-core was higher still at 0.5%, indicating a higher underlying inflation pressure.

Energy prices were the main driver although housing inflation, a recent concern, moderated slightly. The Federal Reserve is unlikely to be too worried about a generalised pick-up in inflation, given some idiosyncratic impacts, but the data does not justify imminent rate cuts. So, it looks like no March reduction and only a 10% chance of one in May, with the three cuts that are priced in being back-loaded to the second half of the year.

In the UK, the January Gross Domestic Product (GDP) figure matched the expectations of a 0.2% increase, signalling a likely end to the H2 2023 recession. This is consistent with Purchasing Manager Index business surveys which have indicated positive private sector output growth. Construction activity was better although manufacturing output stayed unchanged. There was, however, a significant positive contribution in the ‘human health and social work activities’ sector, reflecting fewer strikes whilst more pupils turning up to school was also deemed to be beneficial. This is unlikely to shift the dial for the Monetary Policy Committee (MPC) which meets this week. Nor is the £13.9bn (0.5% of GDP) increase in fiscal policy in 2024-25 announced in the Spring Budget, given that the Office for Budget Responsibility (OBR) only project a modest demand impact of 0.15% in 2024/25. Like the US, markets are pricing in only a 10% chance of a UK base rate cut by May and three reductions later in the year. 

Jamie Dimon, head of JP Morgan, was making some headlines last week with a reminder that a US recession still remained a possibility and that the 70-80% pricing of a soft landing was an overestimation. This is now a pretty unfashionable call but one that needs to be heeded. Yes, the data has been better than expected and the US stock market is buoyant but there are some warning signs. The narrowness of US equity leadership is amazing. The magnificent seven, or more particularly the superb six given Tesla’s recent performance, mask the more pedestrian gains in broad swathes of the US stock market. Looking at the Chicago Fed National Activity Index, one of the most comprehensive of all real economy measures, shows a below zero reading which is certainly not consistent with recent GDP data. My concern remains that the below the top tier of global companies there is a lot more pain.

The 10-year US treasury yield hit 4.3%, a rise of 23bps on the week. In the UK, the rise was half that, taking 10-year gilt yields to 4.1%. Overall, the global tone is that rate cuts are not going to come through as quickly as anticipated and that the neutral level may be a bit higher than previously thought. However, with 20-year UK rates now around 4.5% I think it might be time to increase duration again. On the credit side, demand remained good, with non-gilt index spreads below 1%. ‘All-in’ credit yields look reasonable but long-dated government bonds are favoured, given some of the low spreads seen on longer dated credit bonds. There was a rally in Virgin Money bonds following Nationwide’s offer to buy the company and, if completed, the combined entity will form the second largest mortgage provider in the UK.

The FA Cup quarter finals provided drama last weekend. There were several good lessons to take from them – from an investment perspective. Make sure you maximise your opportunities when you can. More importantly, the seemingly inevitable can quickly change. That is what makes sport and investment so fascinating. Soft landing consensus at 70-80% – I’m with Jamie.


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.