As investors settle back after the summer break, Michael Browne, Global Investment Strategist at Franklin Templeton Institute, argues that many of the forces driving markets remain firmly in place, despite ongoing uncertainty.
As many investors return after summer holidays, the instinct is to look for something new. What’s changed? What should we consider repricing? Has the wind changed direction?
More often than not the answer is ‘no,’ and there is plenty of evidence to back this up. As we gear up for the year’s final quarter, there has been no resolution of anything in the world of geopolitics.
The price of oil continues to revolve around a neat corridor, depending on the news from the Gulf.
The Russia-Ukraine war continues to grind on, the upcoming US midterms continue to show signs of democratic success, whilst the Trump administration continues its tariff campaign, this month on its northern neighbour Canada.
US economic data continues to show progress, with the latest Purchasing Managers’ Index (PMI) data being particularly positive. However, inflation, in particular core inflation, is now proving sticky.
The same can be seen in Europe, where PMI data continues to surprise to the upside, as does inflation.
There seems to be a corridor of 2.9%-3.2% for the major economies and this has reinforced the pre-existing view that the European Central Bank (ECB) will raise interest rates in September. Nothing new, just more certainty.
The market has taken a view is that inflation is transitory. Whether it is driven by higher oil prices, or rising food prices as the European drought hit harvest takes effect, or high gas prices as Europe tries to rebuild stocks in front of the winter.
It is pricing in no more than two rate rises from the Federal Reserve, the ECB or the Bank of England by this time next year.
But in Asia the picture is very different. In Japan it is three potential rate hikes, whilst in Australia the market is pricing in one increase, and then the potential for cuts.
The market is pricing in economic growth into mid-2027 subdued enough to relieve the inflationary pressure right across the globe, whether caused by higher-for-longer oil prices or the rate rises themselves.
At the same time, deficits are a concern. Governments have the desire to spend – on defence, on energy, on infrastructure, on growth. Reviving growth is seen as the key to most incumbents’ political survival, and the bond markets don’t seem to like it.
The debate around interest costs as a percentage of GDP is getting loud in France, the United Kingdom and United States, which reflects the view that the end of the fiscal road is near.
So we are in a period where governments would like to spend more, and certainly will not spend less, and when business confidence is rising. The question is whether inflation is just a blip.
Sure, the vacancy and employment data are not showing signs of tightening at the moment and consumer confidence remains lower from the start of the year in the United States and Europe.
But as these economies improve, one would think this will surely change. But what about artificial intelligence? Rising productivity means fewer jobs, which keeps the pressure on the consumer. Perhaps – but as of yet unproven.
The simple reality as we return to our desks, is that growth in 2026 will turn out to be better than we expected, more resilient to shocks than we thought, and that in a world where supply lines are re-configuring as well as tightening, inflation doesn’t look to be going away.
It’s been a good-news environment for equities, not a great year for bonds, and there is little to suggest a change any time soon.
The more you look, the more the wind is still blowing in the same direction.
Main image: summer, sun glasses, sand, ethan-robertson-SYx3UCHZJlo-unsplash
