Market Commentary 20th February 2023 from Charlie Hancock

Weak performance in the banking sector was a detractor for the large cap FTSE 100, whilst gains in several heavily weighted stocks lifted the index. Energy provider Centrica PLC posted record high profits, with their share price rising by 7.04% across the week. British American Tobacco PLC gained 3.84% and consumer staples giant Unilever rose by 2.49%.

The Consumer Price Index (CPI) rose by 10.1% year on year in January 2023, with the rate of inflation continuing to gradually slow from the peak of 11.1% recorded in October 2022. Other economic data showed that unemployment remained low at 3.7%, whilst wages grew by 6.7%. After stripping out the impact of rising prices, retail sales during January were 5.3% lower than in January 2022, painting a relatively gloomy picture for consumer demand.

Eurozone economic data painted a picture of slowing growth but with continued tightness in the labour market. Industrial production in the region fell by more than expected in December. Germany was the biggest detractor, with manufacturing activity in France and Italy improving. The unemployment rate remained near record lows.

The European Commission raised their European Union (EU) economic growth forecast for 2023 to 0.8%, up from 0.3% in their previous forecast published 3 months ago. The Commission expects Sweden’s economy to shrink across the year, whilst Eurozone inflation is predicted to fall to 6.4% this year and 2.4% in 2024.

Investors paid close attention to US inflation data released during the week. Consumer prices rose at 6.4% on a year on year basis in January, indicating that the headline rate of inflation continues to slow.

The core rate of inflation, which strips out energy and food prices, came in higher than expected at 5.6%. The Producer Price Index (PPI), which measures prices paid by manufacturing firms, rose by more than expected for the month.

Significantly stronger than expected retail sales during January pointed to resilient consumer demand. The data appeared to increase expectations for the Federal Reserve to hike interest rates beyond the widely expected peak of 5.00%, with some market participants calling for a 0.50% increase at the Fed’s next policy meeting rather than another hike of 0.25%.

US-China tensions appeared to remain heightened during the week. China sanctioned two US defence companies, citing weapon sales to Taiwan. Biden stated that he intends to hold discussions with his counterpart Xi Jinping regarding the Chinese balloons which were shot down by the US military.

The Chinese central bank reportedly continued to ramp up stimulus efforts, however, cheap borrowing is failing to have the desired impact, with Chinese citizens paying down mortgages and saving instead of boosting spending.

Japan released Gross Domestic Product (GDP) data for the 4^th quarter of 2022, which showed that the economy expanded by a weaker than expected 0.6%. Increased government spending had a positive impact, together with stronger consumer demand, however, business investment shrank during the period. Kazuo Ueda was put forward to parliament as the nominee for the next Bank of Japan (BoJ) governor. Whilst Ueda is not expected to put forward any proposals which diverge from current loose policy measures, investors are likely to pay close attention to his comments in the coming months.

Yields around the globe rose as investors priced in higher interest rates. Data showing that wage growth in the UK remains relatively strong appeared to contribute to the rise in Gilt yields.

Data showing that the Eurozone labour market remains relatively tight appeared to contribute to upward pressure for Eurozone government bond yields, with investors doubting how soon inflationary pressures will fade.

GBP / EUR – Current 1.1258 Previous 1.1298

The Pound weakened slightly across the week, with a decline of 0.21% vs the US Dollar and 0.35% vs the Euro. Data indicating that UK consumer spending is softening may have contributed to the decline in Sterling.

The US Strategic Petroleum Reserve (SPR) has declined from 656 million barrels in July 2022 to an estimated 346 million barrels as of Friday, which is the lowest level since 1983.