Market Commentary 30th October 2023 – from Will Binks

A Purchasing Managers’ Index (PMI) release on Tuesday showed the UK economy has continued to deteriorate, with both the manufacturing and services sectors seeing recessionary conditions. The services sector release came in worse than anticipated, whilst manufacturing conditions exceeded expectations, although still in a deep decline.

The UK housing market continued to make headlines last week as data showed that mortgage approvals for house purchases in the UK have dropped by 23% since October 2022. Lloyds Banking Group predicts that average house prices will drop 4.7% in 2023 and a further 2.4% in 2024 before seeing any recovery. The Office for National Statistics (ONS) released data showing the unemployment rate rose by 0.2% quarter-on-quarter, reaffirming expectations for the Bank of England (BoE) to pause interest rate hikes at their November policy meeting.

The European Central Bank (ECB) announced that they would keep interest rates unchanged at 4.5%, marking the first time the central bank has not hiked at a policy meeting since July 2022. Purchasing Managers’ Index (PMI) data released on Tuesday showed that the economy in the Eurozone weakened during October, with both the manufacturing and services sectors seeing recessionary conditions.

German inflation, measured by the Consumer Price Index (CPI), slowed to the weakest pace recorded since the outbreak of the war in Ukraine in February 2022 last month, with consumer prices rising by 4.5% year-on-year. The core measure of inflation, which excludes food and energy, slowed to 4.6% from the 5.5% recorded for August.

Gross Domestic Product (GDP) data showed that the US economy expanded by more than expected during the third quarter of 2023, with growth of 4.9% vs the previous estimate of 4.7%. The increase came predominantly from strong consumer spending and the GDP increase marks the biggest gain since the last quarter of 2021.

The number of Americans filing for unemployment benefits remained close to the 9-month low last week and strengthens views that the US Labour market remains tight. Investors anticipate the strong economic data will lead to the Federal Reserve holding rates at the current level.

Investors are optimistic that fresh measures in Beijing could boost China’s economy as the Chinese President, Xi Jinping, signalled zero tolerance for a sharp economic slowdown and made mid-year revisions to the budget, allowing China to issue 1 trillion Yuan in debt ($136bn).

The Core Consumer Price Index (CPI) in Japan’s capital, Tokyo, considered a leading indicator of nationwide trends, unexpectedly accelerated to 2.7% year-on-year in October. The creeping inflation data, alongside higher global interest rates, adds further pressure to the Bank of Japan (BoJ) to make a major change to its current, ultra-loose policy on interest rates.

The release of weak PMI data in the UK sparked hopes that the Bank of England may not need to keep interest rates as high for as long as previously expected, leading to a decline in yields.

The decision from the ECB meeting last week to keep interest rates at 4.5% in the Eurozone helped to prevent German Bund yields from rising last week.

Bond traders in the US eagerly await the Federal Reserve’s meeting later this week where they are expected to pause rates, with traders watching out for hints around the December meeting.

GBP / EUR – Current 1.1472 Previous 1.1482

The Pound fell 0.34% against the US Dollar and by 0.09% against the Euro. Key economists at Barclays expect the Bank of England policymaker, Swati Dhingra, to vote for an interest rate cut this Thursday following recent dovish comments, which may have contributed to weakness in the Pound.

Oil prices remained volatile last week amidst investors weighing up the impact of an economic recovery in China and escalation in the Israel-Hamas war.