Market Commentary 21st August 2023 – from Charlie Hancock

Investors paid close attention to the week’s Consumer Price Index (CPI) data release, which showed that UK inflation slowed from 7.9% in June to 6.8% in July. Falling energy costs and prices for some food staples contributed to the softening in the headline number. Core inflation, which excludes food and energy costs, remained at the same rate as June’s 6.9%.

Labour market data showed that the unemployment rate increased to 4.2% in the 2^nd quarter, up from the 3.9% recorded for the 1^st quarter of 2023. Whilst this indicated the labour market cooled slightly during the 3 month period, wage growth remained elevated at 7.8% per annum.

Following the Italian government’s announcement of plans for a banking windfall tax, the European Central Bank (ECB) reportedly told media outlets that the measures would weaken the Italian banking system and Italy’s economy in general. Reports also suggested that the Italian government broke European Union (EU) rules, which state that Italy’s central bank or the ECB needed to be informed of the tax proposals prior to the official announcement.

The ECB’s chief economist, Philip Lane, said that the Eurozone economy will continue to grow in the coming years and is unlikely to experience a deep or sustained recession. Lane added that households should be in a better financial position due to falling energy prices.

US industrial production expanded by more than expected in July, although analysts noted one of the main drivers was an exceptional increase in electricity output from utility providers to cope with a heatwave. Housebuilding permits rose by 3.9% in July, but this was partly due to a revision for June’s data which saw the monthly decline revised from -8.0% to -11.7%.

Retail sales rose by 3.2% year-on-year in July on a nominal basis, suggesting that much of the increase was due to inflation over the last 12 months. Investors interpreted the week’s economic data as hawkish, whilst the release of minutes from the Fed’s most recent policy meeting showed that some policymakers were concerned about ‘upside risks’ to the inflation outlook.

China’s economic woes continued to dominate newsflow during the week. Evergrande, one of China’s largest real estate developers, filed for US bankruptcy protection, shielding them from US creditors whilst the group attempts to restructure debts with lenders around the globe. The Evergrande announcement came as Chinese state owned developers warned of major losses, with the private sector’s widely publicised issues spilling over into government backed developers and lenders.

China’s central bank delivered the biggest interest rate cut since 2020, although monetary stimulus measures implemented in recent months have failed to have the desired impact. The US government acknowledged the potential global impact of a slowdown in China’s economy, with President Joe Biden calling it a “ticking time bomb”.

Japan reported that their economy expanded by twice as much as expected during the 2^nd quarter, with an annualised growth rate of 6.0%. Much of the increase in output was driven by a rise in exports, with a weak yen contributing to increased demand for Japanese goods. Domestic demand remained relatively weak. The Consumer Price Index (CPI) rose by 3.1% year on year in July, with the rate of inflation slowing from June’s 3.3%.

The week’s wage growth data and elevated core inflation print appeared to contribute to the rise in yields, with some investors concerned that the Bank of England (BoE) will continue hiking beyond the widely expected 0.25% increase in September.

The diary was relatively light for Eurozone economic data. Industrial production rose by more than expected, whilst construction output was weaker than anticipated. The Netherlands reported that Gross Domestic Product (GDP) shrank by 0.3% in the second quarter, with the economy entering recession following a contraction of 0.4% during the first quarter.

GBP / EUR – Current 1.1712 Previous 1.1593

The Pound regained some ground against the US Dollar last week, rising by 0.30%. Against the Euro, the Pound gained 1.03%. The Euro weakened against most major currencies, with news of a recession in the Netherlands appearing to have an impact.