Market Commentary 7th August 2023 – from Charlie Hancock

Mortgage lender Nationwide Building Society reported that house prices declined at the fastest pace since July 2009. The decline of 3.8% year-on-year in July showed that the fall in prices accelerated from June’s decline of 3.5%. The number of new mortgage approvals for June came in higher than expected, but still significantly below the average from 2010 to 2019.

The Bank of England (BoE)’s monetary policy committee voted to raise interest rates by a further 0.25% on Thursday, taking the base rate to its highest level since April 2008 at 5.25%. The hike came as the central bank’s chief economist, Huw Pill, said that there is growing evidence interest rate hikes are slowing down inflation. Pill added that the bank is “trying to balance the risks of doing too little” whilst acknowledging it is possible they do too much.

The Eurozone Consumer Price Index (CPI) showed a year-on-year increase of 5.3% in July, with inflation slowing from June’s rate of 5.5%. The month on month change in consumer prices came in at -0.1%, indicating some deflationary pressures across the Euro area. France, Germany, Italy, Portugal and the Netherlands saw the rate of price increases slow from the previous month, whilst Spain saw the rate of inflation increase from 1.9% in June to 2.3% in July.

The Eurozone economy grew by 0.3% in the 2^nd quarter, beating economist estimates for growth of 0.2%. Analysts noted that that growth in Ireland and France lifted the overall figure substantially, with the Eurozone excluding France and Ireland growing by just 0.04% during the quarter.

Financial strength ratings agency, Fitch, downgraded the US government’s credit rating on Tuesday. Fitch cut the United States’ credit rating from AAA to AA+, citing “medium-term fiscal challenges”. The announcement comes as recent data shows the US government has spent 10% of their total expenditure so far this fiscal year on interest payments.

A Purchasing Managers’ Index (PMI) for US manufacturing showed that the sector remains in recessionary territory, with the reading for July coming in worse than expected. The services sector remained in expansionary territory, but the increase in activity was weaker than expected. July’s payroll report showed 187,000 new jobs were created across the US economy, below the consensus estimate of 200,000. June’s figure was also revised down from 209,000 to 185,000.

Officials from China’s central bank met with property firm bosses last week to discuss an increase in financial support for the sector. The government is reportedly aiming to loosen real estate policy in an attempt to revive the property market and boost economic growth. Chinese technology stocks suffered declines later in the week after the government department tasked with internet regulation announced a set of measures to limit the hours of smartphone use for children. The proposals include a ban on mobile devices accessing the internet between 10pm and 6am for under 18s.

Following a change in the Bank of Japan (BoJ)’s yield curve control programme during the previous week, the central bank unexpectedly announced a series of bond purchases last week after government bond yields reached their highest level since 2014. The intervention appeared to prompt further currency weakness, with the yen losing 1.5% against the US Dollar during the first half of the week.

The President of the Atlanta Federal Reserve, Raphael Bostic, told reporters on Tuesday that there is a growing risk the Fed could “overdo it” by continuing to raise rates. Bostic stated that he feels a further hike in September is not required.

GBP / EUR – Current 1.1581 Previous 1.1666

The Pound lost ground against both the US Dollar and the Euro last week, falling by 0.79% against the greenback and 0.73% against the Eurozone currency. Support for the Pound amongst currency traders appeared to fade in the wake of worse than expected UK PMI survey results.