Market Commentary 31st July 2023 – from Will Binks

Companies in the FTSE 100 saw mixed performance last week. Heavily weighted stocks such as AstraZeneca (+2.67%) and Unilever (+3.47%) helped to lift the total value of the index last week, but these gains had been offset over the week as the utility provider National Grid (-2.13%) and energy giant Shell (-3.16%) held the index back.

The flash S&P manufacturing Purchasing Managers’ Index (PMI) for the UK pointed towards the twelfth consecutive monthly decline and the steepest contraction since May 2020 as businesses sit on high levels of stock given a fall in demand. Input and output costs for manufacturers have reduced as global supply chains improve.

The European Central Bank (ECB) hiked interest rates by 0.25%, taking their key deposit rate to 4.25%, the ninth consecutive rate hike. ECB Members have committed to following a ‘data dependent approach’ to future rate changes and will set them at the required level for a long as necessary to bring inflation back to its 2% target.

Official data showed that consumer confidence recorded by the GfK Group in Germany rose in July, but is still at a pessimistic level. The GfK consumer expert, Rolf Bürkl stated “The main reason for the waning pessimism is the hope of declining inflation rates”.

The Federal Reserve raised interest rates by 0.25% to a headline rate of 5.50%, marking the 11^th consecutive increase following a pause in interest rates in June. US Borrowing costs are now at their highest level since January 2001. Federal Reserve Chairman, Jerome Powell, stated that they will “be making careful assessments meeting by meeting” when asked about future interest rate changes.

The personal consumption expenditure (PCE) index, one of the Federal Reserve’s preferred gauges to measure inflation, recorded a year-on-year increase of 4.1% in June, the lowest since September 2021.

The Bank of Japan (BoJ)’s monetary policy kept their key policy measures unchanged, with its short-term interest rate at -0.1%. This came following their July meeting last week and the policy was passed by unanimous vote. The committee reiterated it will ease their policy to allow long-term bond yields to rise from their current restricted lows, negatively impacting on Japanese stock markets temporarily, but things steadied towards the end of the week.

Newsflow from China continued to point towards a weakening economic recovery in the nation as a lack of demand and pressures on profit margins continue. A closely watched PMI for the Chinese manufacturing sector pointed to the fourth month of a consecutive drop in factory activity. China’s industrial firms also saw a 16.8% decline in profit from a year earlier.

Weaker than expected economic data has tempered expectations of where interest rates will reach, but markets watch closely as the Bank of England (BoE) are expected to hike interest rates by 0.25% this week.

ECB President, Christine Lagarde, stated there was a possibility of an interest rate pause in September which saw investors hold steady as they await further newsflow.

US Data showed the number of jobless claims declined to multi-month lows, whilst the Gross Domestic Product (GDP) expanded by 2.4% in the second quarter of 2023, adding expectations that the Federal Reserve will deliver another interest rate hike.

GBP / EUR – Current 1.1660 Previous 1.1548

The Pound fell 0.07% against the US Dollar as investors moved towards the greenback after release of stronger-than-expected GDP data. Against the Euro, the Pound increased by 0.96%.