Market Commentary 19th June 2023 – from Charlie Hancock

The UK economy performed in line with economist estimates in April, with Gross Domestic Product (GDP) expanding by 0.2% following the contraction of 0.3% experienced in March. Other economic data provided evidence of a tight labour market, with the average earnings increase (excluding bonuses) coming in at 7.2% per annum in April. The unemployment rate declined to 3.8%.

The Bank of England (BoE) Governor, Andrew Bailey, told a parliamentary committee that the central bank still thinks inflation is going to come down, but added “it’s taking a lot longer than expected”.

The European Central Bank (ECB) hiked interest rates by 0.25%, taking their key deposit rate to 3.5%, which is the highest level seen since 2001. ECB officials made hawkish remarks during the week and suggested that a further interest rate increase is likely in July. The central bank also revised their inflation forecasts higher and downgraded their Eurozone economic growth estimates for 2023 and 2024.

Eurozone industrial production increased by 1% during April, following a 3.8% decline in March. Production in France saw an increase and German output was flat, whilst the Netherlands, Spain and Italy all experienced a decline in output. The data pointed to a weak 2^nd quarter GDP print for the Eurozone.

Investors paid close attention to the inflation data released on Tuesday. The headline Consumer Price Index (CPI) rose by 4.0% year-on-year in May, with prices increasing at the slowest pace for 2 years. Core inflation, which strips out food and energy costs, rose by 5.3% year-on-year. Other economic data painted a mixed picture, with retail sales rising during May, whilst weekly jobless claims came in higher than expected.

The Federal Reserve kept interest rates on hold, with Chairman Jerome Powell stating that any decision on interest rates will now be dependent on incoming inflation and growth data. The median projection from voting Fed members indicated that the committee expected 2 further 0.25% hikes by the end of 2023.

The Chinese central bank responded to calls for further stimulus amidst disappointing economic data by cutting interest rates. Authorities in Beijing are also reportedly considering fiscal stimulus measures aimed at stimulating the property market and consumer spending. The unemployment rate amongst 16 to 24 year olds rose to a new record high of 20.8%, which is 4 times higher than the unemployment rate for the wider population.

The Bank of Japan (BoJ)’s monetary policy committee voted unanimously to keep key policy measures unchanged. Although inflation has risen markedly in Japan, the central bank maintained their forecast for consumer price inflation to subside later this year. The Japanese Parliament voted down a no-confidence motion against Prime Minister Fumio Kishida’s cabinet, following speculation that Kishida was considering calling a snap election.

UK mortgage borrowing rates continued to rise, with the average 2 year fixed rate deal reaching just under 6%.

The ECB President, Christine Lagarde, told reporters that the central bank still “has ground to cover” and that interest rates are likely to rise again in July unless there is a material change in their outlook.

GBP / EUR – Current 1.1719 Previous 1.1696

The Pound continued to strengthen last week as calls for further interest rate hikes by the BoE escalated amidst stronger than expected wage growth data. Against the US Dollar, the Pound gained 1.95%, with the greenback weakening against most major currencies. Against the Euro, the Pound rose by 0.20%.

Saudi Arabia’s energy minister told reporters that “there is a disconnect between the physical and futures oil markets”, suggesting that physical supply remains tight whilst demand is relatively strong.