Market Commentary 30th May 2023 – from Charlie Hancock

Investors paid close attention to official data on UK inflation, which showed that the rate of consumer price increases slowed from 10.1% in March to 8.7% in April. The surge in energy costs during early 2022 fell out of the year-on-year comparison, contributing to the lower headline inflation figure, however, it was significantly higher than economist estimates for a print of 8.2%. Core inflation, which excludes food and energy costs, rose to 6.8%, which is the highest level recorded since 1982.

The Bank of England (BoE) governor, Andrew Bailey, stated during a meeting with the Treasury select committee that inflation was likely to fall to the central bank’s 2% target more gradually than their models had previously predicted. Bailey told the committee that he “couldn’t tell you that we’re near to the peak or at the peak” with regard to interest rates.

Revised data on German economic growth showed that the economy entered a technical recession in the first quarter of this year, with Gross Domestic Product (GDP) shrinking by 0.3% following a 0.5% contraction in the final quarter of 2022. A closely watched index on German business confidence declined for the first time in 7 months, with businesses pessimistic about the outlook for the summer months.

During an event marking the 25^th anniversary of the European Central Bank’s formation, the bank’s president, Christine Lagarde, re-iterated that the overriding priority remains bringing inflation down to 2% in a timely manner. Lagarde praised the success of the Euro currency and stated that 80% of European citizens now support the single currency, up from 60% during the Eurozone crisis in 2010.

As was the case during the previous week, a narrow rally in a select number of heavily weighted stocks resulted in the NASDAQ outperforming versus other major indices. Microchip company NVIDIA saw their share price gain 24.57% across the week, after stating that they expect revenues to grow strongly as a result of their products being used in artificial intelligence (AI) applications.

Chinese equities continued to struggle in the wake of disappointing economic data. Last week saw the release of data which showed industrial profits declined by 20% during the first four months of the year, with manufacturing businesses struggling to generate a rebound in sales following last year’s Covid related shutdowns. The data prompted renewed calls for greater fiscal and monetary stimulus.

Japanese economic data was encouraging, with the manufacturing sector growing during May, marking the first increase in activity since August 2022. The services sector saw activity expand at a faster pace than April, with a rebound in tourism contributing to the improvement. The governor of the Bank of Japan (BoJ), Kazuo Ueda, told reporters that they are starting to see positive developments regarding wage growth, which may make the central bank’s 2% inflation target achievable on a long term basis. Ueda added the BoJ will respond quickly if structural changes which would lead to persistent inflationary pressures become evident.

Minutes from the Federal Reserve’s most recent policy committee meeting in May indicated divided opinion amongst the voting members. The notes suggest that the committee is leaning towards a pause in June, with policymakers unsure around how much additional policy tightening will be required to bring inflation down to their 2% target. The Atlanta Fed president, Raphael Bostic, stated during an interview last week that “the tightening we’ve done is just starting to show up in the economy”.

GBP / EUR – Current 1.1512 Previous 1.1518

The Pound lost some ground against the US Dollar last week, falling by 0.81% as the greenback strengthened against most major currencies. Against the Euro, the Pound was broadly flat (-0.05%).