Market Commentary 24th July 2023 – from Will Binks

Data released on the headline Consumer Price Index (CPI) showed a rise of 7.9% year-on-year to June 2023, below expectations and marking the lowest level since March 2022. Fuel costs declined by 22.7% in the 12-months to June, compared with a fall of 13.1% in May. Food prices continued to increase with a rise of 17.3% over the past year, however, this has slowed from 18.4% in May. Core inflation, which excludes food and energy costs, slowed to 6.9%.

Retail sales rose in the month to June 2023 and surpassed market expectations by 0.5%. The increase marks the UK’s third consecutive month of growth within the retail sector, as most sectors saw good growth.

A closely watched Purchasing Managers’ Index (PMI) pointed towards a sharp contraction in the Eurozone manufacturing sector, marking the steepest decline since May 2020, following the outbreak of COVID. The manufacturing sector took a hit all around as output shrank, new orders contracted and payroll numbers fell for the first time since January 2021.

Despite contractions in the manufacturing sector, official data showed that consumer confidence in the Eurozone rose for another month. The more positive news appeared to stem from revised data in the Eurozone showing that growth stagnated in the first quarter of 2023, rather than shrinking as previously thought.

Overall retail sales in the US month-on-month rose, whilst core retail sales, which strips out automobiles, gasoline, building materials and food services, rose three times as quickly. The data continues to signal that consumer spending remains resilient.

Data released last week showed that the number of Americans filing for unemployment benefits declined sharply below expectations, highlighting the tightness within the US labour market. The news is likely to be taken into consideration on Wednesday at the Federal Reserve’s next meeting to vote on interest rates and supports their hawkish rhetoric.

Chinese authorities implemented several targeted stimulus packages last week to boost growth and encourage business activity as the nation has seen slower than expected growth. Chinese Gross Domestic Product (GDP) expanded 0.8% in the second quarter of 2023, down from 2.2% in the first quarter. This comes amidst a property downturn and lingering inflation, suggesting their recovery is losing steam.

The annual inflation rate in Japan, measured by CPI, rose to 3.3% in June, lower than market expectations. The cost of clothing, transport and household utensils saw the biggest increase, but was offset somewhat by the fall in the cost of fuel, light and electricity. Core inflation also rose to 3.3% in June, above the Bank of Japan’s (BoJ) target of 2% for the 15^th consecutive month.

Expectations of where interest rates will peak within the UK have reduced over the past week following some slowdown in business and better than expected inflation data.

A Purchasing Managers’ Index survey showed that the manufacturing sector saw the steepest decline for over three years, alongside signs of cooling inflation and German Bund yields have fallen as investors digest this data.

Economic data suggests that the recent rate hikes from the Federal Reserve are starting to take their toll on more sectors, as demand for services slowed in July.

GBP / EUR – Current 1.1548 Previous 1.1658

The Pound fell 1.84% against the US Dollar. The Pound weakened as traders expect the Bank of England may not have to raise interest rates as high as initially expected. Against the Euro, the Pound declined by 0.94%.