Market Commentary 10th October 2023 – from Will Binks

A closely watched Purchasing Managers’ Index (PMI) release on Wednesday showed that the UK economy weakened during September, with both the manufacturing and services sectors moving deeper into recessionary conditions. The construction sector also saw the fastest contraction since May 2020, with residential work suffering its steepest fall since April 2009, excluding the pandemic.

The UK Prime Minister, Rishi Sunak, announced various planned changes last Wednesday including the scrapping of the northern leg of the HS2 high-speed rail line, claiming to free up £36 billion to re-invest into other transport links in the north. Rishi Sunak also announced a continuous rise in the legal smoking age to ban smoking in the future, which contributed to British American Tobacco falling by 3.65% across the week.

The European property market made headlines last week, with the average house price declining 1.7% in the eurozone over the past 12 months. This marks the first annual decline in house prices in the area in almost a decade. Germany saw the biggest decline in house prices (-9.9
%). The Vice President of the European Central Bank (ECB), Luis de Guindos, stated that this drop was “not a total surprise” and that the ECB’s main concern was commercial property.

Last week saw various dovish comments from the European Central Bank. The ECB Governing Council member, Peter Kazmir, told reporters “I strongly believe that our rate hike at the last meeting was the last one,”. Luis de Guindos also said in a speech last week that they “consider that the key ECB interest rates have now reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target.”.

Data on Friday showed that US payrolls added 336,000 jobs during September, significantly higher than the expected 170,000, marking the strongest gain in eight months. The data does however show a large number of workers looking for jobs have been unable to find full time employment and have instead moved into part-time roles. 73,000 of the new jobs created were government roles, which are generally considered to be a less useful measure for the health of the overall economy.

The number of job openings in the US rose by more than expected in August, with the largest increase in business and financial services. The unemployment rate remained unchanged in September from the month prior and displays mixed signals on the economy, clouding the outlook for interest rates.

There was little news flow in China last week during their eight-day Golden Week holiday. China has been struggling to recover from their extended coronavirus lockdown, but Chinese economists hope the boost in tourism from the holiday should provide some recovery over the following quarter. Data shows domestic travel was higher than 2019 levels according to The Ministry of Culture and Tourism.

Last week saw the Bank of Japan purchase $12.7 billion of Japanese Government Bonds in an attempt to limit the yields on their 5 to 10-year bonds. This came despite recent hawkish comments from the BoJ, which pointed to a possible move away from their ultra-loose monetary policy.

The 10-Year Treasury yield hit a 16-year high of 4.88% last week, but slipped downwards following dovish comments from key Federal Reserve officials. The Fed Vice Chair, Philip Jefferson, noted that the recent run up in yields might reduce the need for further interest rate hikes.

GBP / EUR – Current  1.1560 Previous 1.1538

The Pound moved 0.31% higher against the US Dollar last week. The Federal Reserve and the European Central Bank both released dovish messages last week, which were carefully considered by currency traders. Against the Euro, the Pound gained 0.19%.