Market Commentary 5th June 2023 – from Charlie Hancock

A business confidence survey conducted by Lloyds Banking Group showed that sentiment amongst firms deteriorated during May. The proportion of businesses expecting to implement further price increases in the coming year remained well above the pre pandemic average, suggesting that inflationary pressures are likely to remain an issue in the short term.

Data from mortgage lender Nationwide showed that the average house price declined by 3.4% in the year to May, marking the biggest year-on-year decline since 2009. Nationwide stated that headwinds look set to strengthen in the near term, citing rising mortgage rates.

Investors paid close attention to a number of European inflation data releases last week. Headline Eurozone consumer price inflation slowed to 6.1% in May from the 7.0% recorded for April. Core inflation, which excludes food and energy costs, also slowed during the month and came in lower than economist estimates. Spain saw consumer price inflation slow to 3.2%. The data came as European Central Bank (ECB) president, Christine Lagarde, stated during a speech that there is still ground to cover to bring interest rates to “sufficiently restrictive levels”.

An economic sentiment survey from the European Commission showed that business confidence weakened during May, with services and industrial firms both facing headwinds. Sentiment amongst retail businesses deteriorated sharply, with firms reporting that inventories were too large or above normal.

The announcement of an agreement between congress and the Biden administration regarding the US debt ceiling appeared to have some positive impact on risk assets during the week. The debt ceiling has now been suspended entirely until 2025.

Investors are likely to pay close attention to the impact of a significant amount of US Treasury bond issuance which will take place following the suspension of the debt ceiling. The Treasury General Account (TGA) balance declined significantly in recent months and will now be replenished via new government borrowing.

Friday’s payroll report showed that US employers added 339,000 jobs during May, significantly above economist estimates, however, unemployment data estimated from a survey amongst households painted a different picture, with the unemployment rate rising from 3.4% to 3.7%.

Economic data in China remained relatively gloomy, with a Purchasing Managers’ Index (PMI) showing the manufacturing sector remains in slowdown territory. Data on the property market showed that home sales fell by 14% month-on-month in May. Authorities in Beijing are reportedly working on a range of new measures to support the property sector, with existing policies introduced over the last 18 months failing to have the desired impact on sentiment.

The recently appointed Bank of Japan (BoJ) governor, Kazuo Ueda, continued to make headlines last week. Ueda defended the central bank’s continued low interest rate policy and pushed back against those questioning whether the bank will be forced to raise interest rates in the near future. Ueda stated that the BoJ does not have a set time frame for achieving their 2% inflation target sustainably, although it should not take longer than 10 years.

GBP / EUR – Current 1.1629 Previous 1.1512

The Pound rose by 0.88% against the US Dollar last week and 1.02% against the Euro. Currency traders appeared bullish on the Pound amidst speculation that the Bank of England (BoE) will implement a further interest rate hike at their June policy meeting.