Weekly Market Commentary from Charlie Hancock

The Office for National Statistics reported that the UK economy is estimated to have grown by 0.5% in June. Businesses across various sectors cited the May bank holidays as a reason for activity increasing in June relative to the previous month. The service sector saw muted growth during the month, whilst manufacturing and construction activity bounced back from declines in May.

Although June’s data was better than expected and the UK economy expanded by 0.2% overall during the 2^nd quarter of the year, further headwinds for economic growth are building as rising interest rates continue to impact lending activity across the economy.

Italian equities sold off on Monday after the government announced plans for a windfall tax on bank profits, citing unfair practices in how banks pass on interest rate increases to their depositors. Italy’s largest bank, Intesa Sanpaolo, saw their share price decline by 8.59% during Monday’s session, whilst rival bank UniCredit lost 5.97%. The Italian government backtracked slightly on Tuesday, confirming that any additional tax would be capped at 0.1% of a bank’s assets.

The European Central Bank (ECB) released an updated economic outlook, with the central bank acknowledging that inflation is declining, but stating that it is expected to remain “too high for too long”. The update explained that the ECB intends to keep interest rates at restrictive levels to achieve a “timely return” to their 2% inflation target. The ECB also acknowledged that the outlook for Eurozone economic growth has deteriorated, with consumer demand weakening in recent months.

Investors paid close attention to Thursday’s data release for the US Consumer Price Index (CPI), which showed that year-on-year inflation was 3.2% in July. The increase from June’s CPI print of 3.0% prompted some nervousness amongst investors, on the basis that the Federal Reserve may continue raising interest rates for the foreseeable future, however, July’s inflation reading was broadly in line with expectations.

Analysts noted that an increase in shelter (housing) costs were responsible for 90% of July’s CPI increase, with inflationary pressures elsewhere across the economy subsiding. House prices in many parts of the US are declining and so shelter inflation is also expected to subside in the coming months.

One of China’s largest property developers, Country Garden, failed to make interest payments on 2 bonds last week, suggesting that the real estate sector continues to battle with weak demand and cash flow problems. The company’s Hong Kong listed shares have declined 65% in the last year.

Inflation data showed that consumer prices in China fell by 0.3% in the year to July, with the economy officially falling into deflation. Producer prices fell by 4.4% year-on-year, suggesting weak demand for manufactured goods. Officials in Beijing have downplayed the risks of deflation in recent months and the central bank have stated that consumer price inflation will return to a positive number in the 2^nd half of the year.

Japanese economic data indicated that inflationary pressures continued to fade, whilst wage growth was weaker than expected in June.  An update from the Bank of Japan (BoJ) suggested that the central bank feels the Japanese economy is not at risk of sustained inflation or a wage price spiral and as a result, monetary policy is likely to remain supportive.

Federal Reserve officials delivered mixed remarks last week, with some key figures suggesting that further hikes are necessary and others indicating that the central bank may pause rate hikes imminently.

GBP / EUR – Current 1.1593 Previous 1.1581

The Pound declined by 0.42% against the US Dollar, with the greenback strengthening against most major currencies. Against the Euro, the Pound gained 0.10%. Sentiment amongst currency traders was mixed throughout the week, with Friday’s Gross Domestic Product (GDP) data release appearing to have a positive impact on the Pound.