Market Commentary 25th September 2023 – from Charlie Hancock

The consumer prices index (CPI) rose by less than expected in August, with the annual rate of inflation slowing to 6.7% from the 6.8% recorded in July. Economists had predicted than August’s inflation figure would be 7% given the recent surge in fuel prices. Core inflation, which excludes energy and food, slowed to 6.2%, defying economist expectations for no change from July’s 6.9%.

The BoE announced that they would keep interest rates unchanged at 5.25%, marking the first time the central bank has not hiked at a policy meeting since December 2021. Purchasing Managers’ Index (PMI) data released on Friday showed that the UK economy weakened during August, with both the manufacturing and services sectors seeing recessionary conditions.  The services sector saw activity fall at the fastest pace since the lockdown period of January 2021.

September PMI data for the Eurozone continued to point towards a recession, albeit with business activity declining at a slightly softer pace than it did during August. With the previously resilient services sector seeing a slowdown for the 2^nd month in a row, the data casted doubt on the ability of the Eurozone economy to avoid a broad based recession. The services PMI reading of 46.4 was the weakest since February 2021. The data for the manufacturing sector suggested that activity amongst industrial businesses continued to decline.

The European Union (EU) were reportedly considering proposals to increase support for electric vehicle manufacturing, with German carmakers losing market share to Chinese brands. The European Commission President, Ursula von der Leyen, stated that subsidies in the electric vehicle sector in China are “unleveling our playing field”.

The Federal Reserve kept interest rates unchanged following their policy meeting last week, although the central bank’s voting members indicated they do expect one further hike before the end of 2023. The Fed expects rates will remain close to current levels throughout 2024, with no significant cuts expected until at least 2026. The central bank anticipates that inflation will remain above their 2% target until 2026.

The Fed Chair, Jerome Powell, appeared more hawkish than some investors anticipated. Powell told reporters that the economy “has been able to hold up under the tightening that we’ve done” and suggested that further tightening will be necessary if the economy re-accelerates.

Chinese economic data was mixed. Wages in Shanghai and Beijing fell by 9% and 6% respectively during the 2^nd quarter versus the same period in 2022. The decline was largely driven by falling bonuses in the finance and technology sectors, however, some government sectors also saw pay and subsidies fall. Retail sales and industrial production data came in better than expected for August, whilst the real estate sector continued to deliver gloomy headlines, with a decline in house prices accelerating last month.

The Bank of Japan (BoJ) kept monetary policy measures unchanged at their policy meeting, with negative interest rates and quantitative easing programmes remaining in place. The central bank also reiterated that they could implement even more stimulative policy if required, with policymakers still unconvinced that stable inflation and wage growth will be achieved over the longer term. Japan’s core consumer price index rose by 3.1% year-on-year in August, slightly ahead of median economist estimates for 3.0%.

Friday’s weak Purchasing Managers’ Index (PMI) data somewhat justified the BoE decision to pause interest rate hikes, with the data pointing to the UK entering recession. The central bank’s governor, Andrew Bailey, was not clear on the future direction for policy changes, telling reporters that they “will be watching closely to see if further rate hikes are needed”.

Comments from European Central Bank (ECB) officials appeared to drive yields higher, with the German Bundesbank President, Joachim Nagel, stating that it’s unclear if interest rates have peaked yet. Other officials expressed concern about rising oil prices.

GBP / EUR – Current 1.1499 Previous 1.1616

The Pound lost ground against other major currencies last week amidst weak economic data and a pause in interest rate hikes by the BoE. Against the US Dollar and the Euro, the Pound declined by 1.15% and 1.00% respectively.