Market Commentary 22nd May 2023 – from Charlie Hancock

The unemployment rate in the UK rose slightly during the first quarter of 2023, but at 3.9%, it remained relatively close to the all-time low of 3.40% recorded in the 1970s. Wage growth remained elevated at 6.7%. On a less positive note, a monthly update from HMRC showed a relatively sharp decline in the number of employees on a payroll during the month of April, marking the first monthly decrease since the pandemic.

The Bank of England (BoE) governor, Andrew Bailey, warned during a speech on Wednesday that, whilst headline inflation is likely to fall over the coming months, it will remain above the bank’s 2% target for some time. Bailey said that labour market strength is not unwinding as quickly as the central bank anticipated and suggested that the UK is facing some form of wage price spiral.

Official data showed that Eurozone industrial production shrank by 4.1% in March, significantly worse than economist estimates for a decline of 2.5%. Whilst Germany’s declining factory activity was a significant contributor, France and Italy also experienced notable weakness.

The European Commission revised their economic growth forecasts higher and appeared confident that the Eurozone economy will avoid a recession, despite severe weakness in the manufacturing sector. The commission also expects inflation will remain above the European Central Bank’s target of 2% until 2024.

Significant gains in large cap stocks such as Microsoft (+3.03%), Nvidia (+10.32%) and Amazon (+5.43%) drove the S&P 500 and Nasdaq indices higher, masking weakness in other areas. The muted increase in the Dow Jones Industrial Average was evidence of a narrow rally, with many areas of the stock market not participating in the increase.

Investors appeared to be encouraged by comments from Joe Biden and the Republican House Speaker, Kevin McCarthy, with both sides speaking positively on the possibility of reaching an agreement in the debt ceiling negotiations. The tone deteriorated as the week progressed, with no clear resolution in sight.

US retail sales data for April came in weaker than expected, with a nominal increase of 1.6% in comparison to the previous April. The inflation adjusted data shows a significant decline in consumer spending since April 2022.

Economic data from China suggested that the post covid recovery remains disappointing, with retail sales and industrial production coming in weaker than expected. The unemployment rate amongst 16-24 year olds rose to a record high of 20.4%, suggesting that China’s economy is not strong enough to absorb the vast number of new entrants to the job market. The weak data led to economists downgrading growth forecasts and calling for further stimulus measures.

Official data showed that the Japanese economy grew by more than expected during the first quarter of 2023, with strong domestic consumption offsetting some of the weakness in international trade. The Bank of Japan (BoJ) governor reiterated the central bank’s intention to maintain low interest rates, citing the risks posed by a slowing global economy. Data released during the week showed that consumer prices in Japan rose by 3.4% year-on-year in April.

Much of the rise in yields appeared to be driven by hawkish comments from Fed chief Jerome Powell, who stated that inflation is far too high and that the central bank is committed to bringing it below their target of 2%.

GBP / EUR – Current 1.1518 Previous 1.1478

The Pound was broadly flat against the US Dollar (-0.10%), whilst rising by 0.35% against the Eurozone currency. Against most major currencies other than the US Dollar, the Pound moved higher as traders bet on an increased probability of further Bank of England (BoE) interest rate hikes.