Market Commentary 12th June 2023 – from Charlie Hancock

Headlines regarding the UK property market were widespread last week after mortgage lenders Nationwide and Halifax reported further declines in house prices. Halifax stated that house prices fell by 1% year-on-year in May, whilst Nationwide reported a 3.4% decline. The year-on-year change marks the steepest decline since 2012.

The property market continues to face headwinds, with lenders pulling a number of mortgage products in recent weeks amidst rising borrowing costs. There are an estimated 1.5 million mortgages reaching the end of fixed rate deals during 2023, with borrowers facing significantly higher interest rates.

A revision to previous Gross Domestic Product (GDP) data showed that the Eurozone entered a technical recession during the first quarter of 2023, with the economy shrinking by 0.1% after also experiencing a 0.1% contraction in the final quarter of 2022. The data came as the President of the European Central Bank (ECB), Christine Lagarde, indicated that a further interest rate increase is likely to be implemented later this month.

Retail sales in the Eurozone were flat during April, whilst the year-on-year change in the volume of goods sold came in at -2.6%, indicating weakness amongst consumers. German industrial production expanded by less than expected during April, pointing to weak demand.

A Purchasing Managers’ Index (PMI) from The Institute for Supply Management (ISM) showed that growth in the services sector weakened during May, with the index declining to 50.3 from 51.9 in April. The reading defied expectations for an improvement, with the median economist estimate being 52.2.

The ISM manufacturing PMI remained in recessionary territory for the 7^th consecutive month, despite a jump in factory orders for defence related equipment. Meanwhile, the US labour department reported that the number of weekly jobless claims rose to 261,000, which was significantly higher than expected and marked the highest number of claims since October 2021.

China recorded consumer price inflation of just 0.2% during May, whilst producer prices declined by 4.6%. The data sparked renewed concerns of deflationary pressures in the Chinese economy. Chinese exports fell by 7.5% year-on-year during May, pointing to weak demand around the globe. PMI data was better than expected, with the services sector expanding at a faster pace than it did during April.

Data in Japan pointed to a continued economic recovery, with the manufacturing sector growing for the first time in 8 months. Revised GDP data showed that the economy grew by more than previously estimated during the first quarter of the year, with an expansion of 2.7%. Better than expected business investment helped drive growth during the quarter.

Mortgage lenders appeared to be concerned by the recent move higher in Gilt yields, with HSBC announcing last week that they would temporarily withdraw all deals for new borrowers in order to review their rates.

Comments from ECB officials were mixed last week, with Christine Lagarde voicing concerns about continued inflationary pressures, whilst the governor of the Dutch central bank appeared more dovish by suggesting that there is growing evidence tighter monetary policy is working.

Whilst the US Treasury is expected to issue a significant amount of new debt in the coming weeks following the suspension of the debt ceiling, the week’s economic data, including a jump in unemployment claims, appeared to keep a lid on Treasury yields.

GBP / EUR – Current 1.1696 Previous 1.1629

The Pound gained 0.96% against the US Dollar last week, with the greenback weakening amidst rising expectations for the Federal Reserve to pause interest rate hikes at their June meeting. Against the Euro, the Pound moved 0.58% higher.