Your weekly economic update from the team at FXD Capital
The reflation narrative that has captivated markets for the past three months is abruptly evaporating before our eyes, and markets show a distinct flavour of déjà vu. It’s as if we are back in January again, where growth stocks were de rigueur, interest rates anaemic and central banks’ sole desire was to keep the music playing. But, instead, markets seem caught off guard; we are back again at a point where everything seems to be at all-time highs and no-one knows what’s next.
Suddenly, the thoughts of hyperinflation and apathetic central bank policies all seem like a hazy dream. Sentiment has become more apparent that prices aren’t going out of control, and rates will increase far quicker than envisaged. The canary in the coalmine was commodity prices, with copper and lumber, in particular, reigning in recent games as a leading indicator for the sentiment overshot. Nervous overtures from government finance top brass also provided reality checks, with Rishi Sunak this week pondering the end of triple-lock pensions: a sure-fire signal that tax increases are top of mind for the government.
In terms of rates, banking and the UK market, JPMorgan’s acquisition of Nutmeg for £700m is a fascinating proposition. JPM has popped up in conversation several times over its desire to enter the UK retail space; its acquisition of Nutmeg is a textbook example of an accelerated strategy for market entry.
Robo-advising can flatter to deceive; its promise of egalitarian fund management delivered with rational rebalancing takes the guise of a wolf in sheep’s clothing: customers are given baskets of cheap ETFs and charged a healthy AUM change for the pleasure of quarterly rebalancing.
JPMorgan’s intention for buying Nutmeg is purely for the customer base, not the technology. With an audience of savers (primarily millennials), the bank is buying a sticky group of customers who will be active for another 40 years until drawdown. During this time, there will be an array of cross-selling opportunities for monetising them. To enter the retail market, JPMorgan has bought a canvas, with which it can now start to paint with its collection of financial products.
If you had a blank canvas for entering the retail financial market, a pension book would be top of the list. In a world of low interest rates, pensions offer the haven of scalable fee structures entirely independent from macroeconomic policy. For JPMorgan, the added incentive now will be to augment the Nutmeg product set with its own originated products and earn further management fees for ETF or fund products.
The next logistical step for its fast-tracked bank would be a neobank fintech upstart or a book of credit assets.
House prices fell for the first time since January, contracting 0.5% in the month of June. With the stamp duty holiday concluding, the period of recent price exuberance may also be drawing to a close. Up until now, indications were for potential increases in deposit rates to fuel the incessant conveyor belt of mortgage originations. However, the stamp duty holiday was a chimera to some extent, with house price increases seemingly equalising the tax benefits. All indications point towards house prices swiftly resuming their upward trend; the only grey area is how inner cities respond to the upcoming wave of commercial vacancies.
June Fed minutes showed a divisive debate over whether the economic rebound is strong enough to start dialling in monetary stimulus. Two clear camps exist within the Fed, the doves and the hawks. While it’s healthy to have such diverse thoughts duelling over appropriate responses to prevailing dilemmas, it leads markets into a state of flux. Recent months have seen markets whipsaw upon the release of the Fed Minutes, which historically has been a non-event. Expect this to continue for the rest of the year.
The ECB announced a new 2% inflation target on Thursday in its first strategy review since 2003. Having such a target will afford the institution mandate flexibility similar to that of the UK for pulling its levers around a broader macro mark. As hinted in the leadup, there was also an announcement of new rules pertaining to carbon emissions, whereby collateral linked to heavy polluters will carry more stringent haircuts. The moves are in the right direction, and the carbon policy is particularly savvy: regulation is the tail that wags the dog for financial institutions, and it will curry favour with the public.
Whether the ECB can get inflation up to 2% is another question….
All the best for the week ahead
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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