Market Commentary 30th August 2023 – from Charlie Hancock

A purchasing managers’ index (PMI) for August indicated that business activity in the UK shrank at the fastest pace since the coronavirus lockdown restrictions in January 2021. The manufacturing sector saw activity decline at a faster pace than July, whilst the services sector unexpectedly entered recessionary territory.

Other economic data for the UK continued to paint a relatively gloomy picture. Retail sales during August declined at the fastest pace since March 2021, whilst a survey amongst retailers showed that further weakness is expected in the coming months.

PMI data for the Eurozone suggested that business activity contracted during August, marking the third consecutive month of weakness. Manufacturing businesses in the Eurozone saw activity shrink at a slightly slower pace than July, but the sector remained in recessionary territory. The services sector saw activity unexpectedly decline, dragging the composite index, which measures both sectors, to its lowest level since November 2020.

A closely watched German business confidence index fell for the fourth consecutive month, reaching its lowest level since October 2022. Meanwhile, the German central bank stated that they expect economic growth to remain flat for the third quarter. The Bundesbank anticipates that industrial output will remain weak, however, they are forecasting a recovery in consumer spending.

PMI data for the US indicated that activity in the manufacturing sector fell by more than anticipated during August, defying hopes for an improvement from July’s reading. The data for the service sector indicated that the sector remained in expansionary territory, but growth was significantly weaker than expected.

Investors paid close attention to central banker comments at the annual Jackson Hole meeting. The chair of the Federal Reserve, Jerome Powell, appeared to acknowledge that higher interest rates were working their way through the US economy, however, Powell also stated that economic growth is above its longer term trend, which could bolster the case for further rate hikes. Powell appeared to acknowledge that the economic outlook remains highly uncertain, stating that “we are navigating by the stars under cloudy skies”.

Amidst continued weakness in the real estate sector, regulators in Beijing loosened the criteria for mortgage applications to try and attract more buyers in major cities. Geo-political tensions between China and Japan flared up after Japan started to release wastewater from the Fukushima nuclear disaster into the Pacific Ocean. Authorities in Beijing banned all Japanese seafood imports in response and there was reportedly widespread public outrage on China’s social media platforms.

PMI data for Japan indicated that activity in the services sector continued to expand during August, whilst the manufacturing sector saw activity contract at a slower pace than July. A measure of consumer price inflation in Tokyo indicated that inflationary pressures continued to fade during the month, with year-on-year inflation of 2.9% versus the 3.2% recorded for July.

The week’s mixed economic data for the US saw increased volatility in yields, with investors torn on whether the Federal Reserve will continue hiking or leave interest rates on hold.

GBP / EUR – Current 1.1655 Previous 1.1712

The Pound weakened against most major currencies last week as UK economic data painted a relatively gloomy picture. Against the US Dollar, the Pound declined by 1.23%. Against the Euro, the Pound lost 0.49%.