- 29th August 2023
- Posted by: Celticfp
- Category: Investment Committee
The US is growing faster than Europe
Recently, there was a global drop in bond prices, which caused their yields (returns) to rise. But by last week, these yields decreased because businesses felt less confident about the future. The business confidence numbers were particularly poor in Europe and the UK. In the US, they were not great either, but they showed that things aren’t going backward. The latest data from the US indicates that their economy is growing steadily.
One of the reasons for this difference between Europe and the US is the higher energy prices in Europe, particularly for gas and electricity. Even though energy prices dropped earlier this year, they’ve recently gone up again, impacting businesses. Additionally, car manufacturers in Europe are struggling more than their counterparts in the US, especially as Chinese electric carmakers are gaining more customers.
It’s not rare for regions like Europe and the US to grow at different rates. Europe has faced challenges in the past, like the euro crisis. While we don’t expect another huge crisis soon, it’s evident that Europe’s growth is slower compared to the US. This could make the US dollar stronger. During the weekend, central bankers met in Wyoming to discuss big shifts in the global economy. We hoped to get clearer insights from this meeting, but not much was revealed. However, the calm response from the bankers made many believe that interest rates have reached their peak.
EU and UK Business Confidence Drops
Last week, we mentioned the British pound (sterling) being vulnerable. On cue, it decreased in value compared to the US dollar. This was mainly because recent surveys showed a very negative outlook on the UK economy. Simply put, any score above 50 in these surveys means the economy is likely to grow, while below 50 suggests it might shrink. The recent UK score was a concerning 47.9. What’s more, the services industry, a major part of the UK’s economy, also scored below 50. Due to these numbers, many believe that the UK’s central bank may not raise interest rates soon. This further puts pressure on the British pound.
In Europe, the situation wasn’t much better. The scores indicating business confidence were the lowest in nearly three years. Because of this, the European Central Bank might also be hesitant to raise interest rates. Additionally, Europe is facing labour shortages, which could lead to increased prices.
Is Japan’s Central Bank Changing Strategy?
Recently, the return on 10-year Japanese bonds rose to its highest in nine years. For context, compared to UK and US bonds, this might seem unimpressive. Historically, Japanese bonds have been stable. But recently, the head of Japan’s central bank hinted at a change in their bond strategy. This might mean the bank will be less involved in controlling bond returns.
Some experts have expressed concerns about rising prices in Japan unless the central bank acts quickly. While prices have been increasing, they are still within the bank’s target range. Japan’s issue is different from the West. They don’t have rapidly increasing wages, which often leads to high inflation. In fact, Japan’s central bank has been trying to increase wages to boost their economy.
However, it’s too early for Japan’s central bank to make big changes. They know that Japan’s attractive qualities for investors could change if global conditions shift. Even if they adjust their bond strategy, it’s not a complete change in their approach. This is good for global investors because Japanese bonds play a big role in the world’s bond markets. The increase in Japanese bond returns is a notable development, but it’s not likely to disrupt global markets.
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This article is for information purposes only – should not be perceived as financial advice. We recommend you should always speak to a financial adviser before making any investment decisions.
Please note, past performance is not a reliable indicator to future returns. Your investment may fall as well as rise, and you may not get back what you put in.