Market Commentary 6th March 2023 from Charlie Hancock

Data on the UK housing market continued to point to a sharp slowdown in activity. The number of mortgage approvals during January fell to levels last seen during the early stages of the Coronavirus pandemic. The average UK house price fell by 1.1% in the year to February 2023, according to mortgage lender Nationwide. Zoopla reported that more than 40% of the website’s current listings have seen a reduction in the original asking price, suggesting that buyer demand is weak at present.

UK housebuilder Persimmon PLC added to the gloomy sentiment on the property market, with the company cutting their dividend by 75% and forecasting a decline in sales over the next year. Their share price fell by 8% across the week.

Headline inflation in the Eurozone slowed to an annual rate of 8.5% in February, down from the 8.6% recorded for January. The main contributor to the slower rate of inflation was a reduction in energy prices. Core inflation, which excludes food and energy, accelerated during the month to 5.6% from the 5.3% recorded for January.

The increase in core Eurozone inflation indicated that inflationary pressures remain an issue for the Eurozone economy. Christine Lagarde, the President of the European Central Bank (ECB), stated last week that a further interest rate hike of 0.50% is likely to be implemented following their policy meeting later this month.

It was a relatively busy week for US economic data. Purchasing Managers’ Index (PMI) data indicated that the manufacturing sector continued to shrink during February, albeit at a shallower pace than January. The services sector remained in expansionary  territory, but indicated that growth was weaker than it was in January. Business investment showed signs of improving.

The president of the Atlanta Federal Reserve, Raphael Bostic, appeared to spark an increase in risk appetite amongst investors during the week, after stating that the “Fed could be in a position to pause (interest rate hikes) by mid to late Summer”. Bostic stated that he is in favour of a 0.25% hike at the Fed’s policy meeting later this month.

Economic data from China indicated that the post Covid recovery is underway at a strong pace, with the manufacturing sector seeing activity improve notably during February. Consumer spending rose, whilst the housing market also started to show some signs of improvement. Authorities in Beijing are expected to set a target of 5% GDP growth for 2023, with further fiscal stimulus expected throughout the year to ensure the economic recovery remains on track.

The incoming Japanese central bank governor, Kazuo Ueda, told parliament that monetary policy at the Bank of Japan (BoJ) needs to remain loose for the foreseeable future. Ueda stated that the merits of accommodative policy, including stronger corporate profits and employment, outweigh any side effects on market functioning. The comments came as data showed that consumer prices in Tokyo increased at a slightly slower pace during February, with government efforts to subsidise utility bills helping to lower the rate of inflation.

Andrew Bailey, the governor of the Bank of England (BoE), delivered mixed remarks during a speech last week. Bailey stated that the central bank may need to raise interest rates above 4%, but added that another hike is not inevitable. Bailey feels any monetary policy decisions will be data dependent and appeared to leave the door open for either further hikes or a pause.

Whilst the week’s economic data for the US was generally strong, comments from Federal Reserve officials which suggested that the central bank is nearing the end of its tightening cycle appeared to contribute to yields remaining unchanged for the week.

GBP / EUR – Current 1.1327 Previous 1.1328

The Pound gained 0.77% against the Dollar across the week, with the US’ currency giving up some strength as risk appetite amongst investors improved. Against the Euro, Sterling was broadly flat.