Market Commentary 17th July 2023 – from Charlie Hancock

Data from the Office for National Statistics (ONS) showed that the UK economy shrank by a shallower than expected 0.1% in May, following an expansion of 0.2% in April. Overall, the economy flatlined in the 3 months to May 2023, with declines in construction and manufacturing activity weighing on growth. Data on wages indicated that the labour market remains relatively tight, with pay excluding bonuses rising at an annual rate of 7.3% in the 3 months to May.

Headlines regarding the property sector continued to paint a gloomy picture. The Royal Institution of Chartered Surveyors (RICS) reported that buyer interest slumped during May, whilst mortgage interest rates continued to rise, reaching the highest level since August 2008.

The release of minutes from the most recent European Central Bank (ECB) policy meeting confirmed that the main concern amongst senior officials at the central bank was still high inflation, rather than slowing economic growth across the Eurozone. Most members appeared to have a hawkish view, although there was some acknowledgment that the central bank is nearing peak interest rates.

The Dutch government collapsed following a no confidence vote against the Prime Minister, Mark Rutte. The 4 political parties which make up the coalition government reached loggerheads following intense debates on immigration, with Prime Minister Rutte attempting to introduce much stricter policies. Rutte is expected to continue as caretaker Prime Minister until a general election is held in the autumn.

The most significant data release in the US last week was the Consumer Price Index (CPI) data for June. The headline rate of inflation slowed to 3.00%, which was lower than expected. Core inflation, which strips out food and energy costs, slowed to 4.8%.

Producer Price Index (PPI) data, which measures output prices from product and service producers rather than consumer facing businesses, indicated that year-on-year inflation was just 0.1%.  Investors reacted positively to the two sets of inflation data, with growing anticipation that the Federal Reserve will stop hiking interest rates.

Federal Reserve members continued to sound hawkish, with Fed governor Christopher Wallace stating during a speech that two more rate hikes might be necessary this year. Market pricing currently suggests a 0.25% rate hike later this month is highly likely.

Economic data in China pointed to continued weakness and a slower than expected economic recovery. Exports fell by 12% year-on-year during June, significantly worse than the 4.1% consensus estimate amongst economists. Consumer Price Index (CPI) data showed that the headline rate of inflation was 0% year-on-year during June, whilst the Producer Price Index (PPI) fell by 5.4% year-on-year, marking the sharpest decline in prices since 2015. The Chinese central bank stated that they expect consumer price inflation to turn negative in July.

There was little newsflow in Japan last week. The yen moved higher versus the US Dollar, with currency traders appearing to price in rising expectations for the Bank of Japan (BoJ) to move away from their current monetary policy stance. There is growing speculation that the BoJ will revise their yield curve control programme, which involves purchasing large amounts of Japanese government bonds to keep borrowing rates low.

UK Prime Minister Rishi Sunak hinted that fiscal stimulus would be limited ahead of the next general election and that tax cuts are unlikely, stating that reducing inflation will take priority over “everything else”.

Although the latest ECB policy meeting minutes pointed to a hawkish outlook overall, most members acknowledged that any rate hike decisions will be dependent on incoming economic data.

Wednesday’s inflation data put downward pressure on Treasury yields. Bond traders appeared to shrug off data showing that the labour market remained tight, with weekly jobless claims coming in lower than expected.

GBP / EUR – Current 1.1658 Previous 1.1701

The Pound gained 1.98% against the US Dollar, reaching the highest level since April 2022. The US Dollar weakened as currency traders priced in a higher chance of the Federal Reserve nearing the end of their hiking cycle. Against the Euro, the Pound declined by 0.37%.