Market Commentary 3rd April 2023 from Charlie Hancock

Newsflow during the week was generally negative. Nationwide Building Society reported that house prices fell by 3.1% year-on-year in March, which marks the steepest decline since the financial crisis in 2009. Nationwide stated that housing market activity remains subdued and that it will be difficult for the market to regain momentum in the short term, with consumer confidence weak and household budgets under pressure.

Official data showed that headline consumer price inflation across the Eurozone slowed to 6.9% in March from the 8.5% recorded in February. A relatively sharp year-on-year decline in energy prices was a major contributor to the fall in headline inflation. Core inflation increased during the month, rising from 5.6% in February to 5.7%, suggesting that broad inflationary pressures remain an issue across Europe.

Widespread protests in France continued last week, with unions organising strikes and demonstrations against a proposed increase in the state retirement age. The strikes have impacted a wide range of public and private sector industries, with the Orly airport in Paris reportedly cancelling 20% of flights on Tuesday and Wednesday. Emmanuel Macron, the French Prime Minister, has thus far resisted calls to ditch the pension reforms.

With regulators and the US government still analysing the collapse of SVB and Signature Bank, the Biden administration proposed a new set of regulations for medium sized banks across the US. The proposals would see tighter stress testing measures for banks with assets of between $100 billion and $250 billion.

The core personal consumption expenditure (PCE) index, which is a measure of inflation that is closely monitored by the Federal Reserve, recorded a smaller than expected increase during February. Prices measured by the PCE index rose at 4.6%, down from the 5.4% recorded in February. Whilst investors appeared encouraged by the data, the Federal Reserve are unlikely to declare the fight against inflation over whilst inflation remains significantly above their 2% target.

A Purchasing Managers’ Index (PMI) for the manufacturing sector in China came in higher than expected for March, whilst a services PMI indicated that activity grew at the strongest pace since 2011. Government borrowing increased by a record amount during the first quarter of 2023, with authorities in Beijing ramping up spending efforts. Chinese e-commerce giant Alibaba announced they would be splitting up into 6 separate entities, with hopes that the break up will satisfy regulators who have attempted to crack down on monopoly like practices.

The Japanese government announced restrictions on exports of microchip making equipment, following similar measures by the Netherlands and the US. The controls are scheduled to come into force from July, with Japan’s trade minister stating the main aim of the policy is to curb the use of equipment for military purposes. Whilst there was no reference to China in the official statement, the Chinese foreign minister reportedly warned his Japanese counterpart against imposing the measures.

The previous week’s strong inflation print appeared to continue impacting sentiment in the Gilt market, with upward pressure on yields across the week.

European Central Bank (ECB) member Isabel Schnabel stated that European banks have not seen any deposit outflows and that the Eurozone banking sector looks “rather resilient”. Schnabel acknowledged that the pressures in the US banking sector could tighten credit conditions and that the disinflationary impact of this would need to be considered by the central bank when making policy decisions.

GBP / EUR – Current 1.1374 Previous 1.1366

The Pound gained 0.85% against the US Dollar last week, with the greenback weakening against most major currencies. Against the Euro, the Pound was broadly flat (+0.07%).