WeeklyWatch – Eyes are on the US job market while Chinese economy is causing concerns

5th September 2023

Stock Take

Last week, we learned that Burger King is being sued in the US on claims that its Whopper burger seems larger on the menu than it actually is. This gave the narrative of food inflation a new twist.

The Fed’s inflation battle continues

In less burger-focused news, markets kept looking for evidence that the Federal Reserve was succeeding in its fight against inflation. Wall Street slightly increased throughout the course of the week amid optimism that the Fed will maintain interest rates at its monetary policy meeting later this month. This was, however, in the wake of poor economic statistics. It’s not the first time this year that bad news has turned out to be good news.

Because the US economy expanded at a somewhat slower rate than initially anticipated, the second-quarter GDP was dramatically revised downward. However, the ongoing steady growth and indications that momentum sped up early this quarter imply that a recession is not imminent.

Sharp drop in US job openings

Mid-week news announced that the hiring rate in the US plunged to its lowest level since April 2020, while in July, the number of job opportunities also fell to its lowest level in two and a half years. Growth in private payrolls also decreased significantly in August. According to data released on Friday, the US added 187,000 jobs in August – the same number as in July – despite the unemployment rate rising to 3.8%, the highest level in more than a year.

There is still a way to go until inflation is reduced to 2%, and it’s clear that the full consequences of the Fed’s rate rises have not yet been realised, but authorities will find solace in evidence that the employment market is cooling rather than deteriorating drastically. The central bank’s objective of creating a ‘soft landing’ may yet be attained.

Non-manufacturing activity in China hits new low

Figures made public in China on Thursday verified that manufacturing activity slightly improved in August but still showed a decline for a fifth straight month. There are more indications that the decline in the second-largest economy in the world has not yet bottomed out as non-manufacturing activity reached a new low for the year.

The nation’s real estate industry is still experiencing a confidence crisis. Up until recently, a third of China’s total wealth was derived from the real estate market, but credit problems and slow sales have decimated the industry. Evergrande, the most indebted real estate company in the world with liabilities totalling £260 billion, lost more than 99% of the value of its shares over the last three years, and the stock plunged about 80% on Monday when trading reopened for the first time in nearly 18 months.

The largest private property developer in China, Country Garden, then issued a default warning after posting a record loss of £5.2 billion in the first half of the year.

China moves to shore up investor confidence

Beijing unveiled an abundance of support measures in an effort to stabilise markets as there were further worries that the crisis would have an increasing negative impact on the nation’s economy, undermining consumer confidence and frightening investors. Both the down payment requirements and interest rates for current first-time buyer mortgages were reduced in various cities. Additionally, the government reduced the stamp duty on stock trading by half and halted new listings.

The recently announced measures provided some solace for equity markets, but worries that Beijing’s modest reaction is merely a superficial touch-up persist, as it’s thought that the measures are far from what is required to support its ailing economy.

Stocks had their worst month of the year in August as a result of bleak attitudes towards China, which generated market performance consistent with seasonal fears. Global equities lost some of their recent gains in August, falling 2.6%, with emerging markets leading the losses. Despite a monthly decline of almost 2%, the S&P 500 is still up more than 17% for the year.

Europe’s stagnant inflation levels in August

In the eurozone, investors processed the fact that August’s inflation rate remained unchanged at 5.3%. Meanwhile, concerns increased that the European Central Bank will hike interest rates once again to a new record high when it meets later this month. European shares ended the month down 2.7%. This is despite growing evidence that the European economy is in danger of entering a recession, with Germany’s economy – the biggest in Europe – at the top of the list of concerns.

Wealth Check

It’s easy to forget about your death-in-service benefits amid the excitement of getting a brand-new job or an important promotion. Naturally, negotiating your new wage or flexible hours is at the forefront of your mind. New jobs, after all, are all about the future, not the distant prospect that you could pass away while working.

An employee benefits programme frequently includes a death-in-service benefit. If you pass away while working for the company, your loved ones will get a lump sum payment. Most death-in-service benefits are paid out to your designated beneficiary as a multiple of your pay, usually between two and four times your yearly gross income.

However, that sizable lump sum may have an unintended side effect that could ultimately cost your loved ones more in Inheritance Tax (IHT).

Many employers’ death-in-service plans are structured as trust agreements, so while your estate is being wound up, the funds won’t be subject to Inheritance Tax.

If your next of kin receives the funds in a sizable cash lump sum, it will increase their estate and therefore could greatly increase their own IHT bill.

In many cases, it makes sense to treat death-in-service benefits in the same manner as a lump sum inheritance. And fortunately, there is a way to use a Legacy Preservation Trust (LPT) as a fully legal tax shelter to safeguard your family’s financial well-being.

The death-in-service payments can be paid directly into the LPT after your passing or the LPT can be set up during your life. You can make tax-free withdrawals of any amount at any time, while the remaining assets in your trust are not included in your IHT estate.

Getting expert financial advice is essential to have peace of mind with any trust. And understanding why you are establishing the trust is just as important as selecting your trustees. That’s why it’s a really good idea to talk with your financial adviser about how you want your money to help your family. An LPT may be able to pay for school-related costs or generate income for several households. It could even mean that you pay off a mortgage early or help your children set up their first business.

Trusts are not regulated by the Financial Conduct Authority.

The Last Word

“China will stay committed to advancing high standard opening up, pursuing Chinese modernisation on all fronts with high-quality development and creating new opportunities for open cooperation across the world.”

– Chinese President Xi Jinping outlines his vision for continued Chinese development.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2023; all rights reserved.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP approved 04/09/2023