Market Commentary 4th September 2023 – from Charlie Hancock

The UK property market continued to make headlines in the business press, with mortgage lender Nationwide stating that the average UK house price declined by 5.3% over the last year. This marked the biggest year-on-year fall since July 2009. The month-on-month decline between July and August came in at 0.8%, which was significantly above expectations for a fall of 0.2% and showed that the widely predicted fall in property prices is happening at a faster pace than anticipated.

The Bank of England (BoE)’s chief economist, Huw Pill, suggested last week that he will vote to keep interest rates on hold at the central bank’s policy meeting later this month. Pill did however state that “core inflation remains stubbornly high” and indicated that he would be in favour of keeping interest rates at the current level until 2026.

Investors paid close attention to Eurozone inflation data, which showed that consumer price inflation was 5.3% in August, slightly ahead of the median economist estimate for 5.1%. Minutes from the European Central Bank (ECB)’s most recent policy meeting in July suggested that voting members were divided on whether to implement another interest rate hike in September. The minutes also showed that senior figures at the central bank felt strong labour market conditions could help the Eurozone economy achieve a soft landing.

Retail sales data in Germany came in significantly worse than expected. Between June and July, retail sales fell by 0.8% vs expectations for a rise of 0.3%, suggesting that inflation and other economic developments are hurting consumer demand.

The number of job openings in the US declined by more than expected in July, whilst the number of employees quitting their jobs fell, suggesting US workers are less confident about leaving their current roles.

Data on Friday showed that US payrolls added 187,000 jobs during August, which was broadly in line with expectations, however, the number of jobs added during earlier months were revised lower. The downward revision was sharp, with 111,000 fewer jobs added that previously thought during June and July.

The People’s Bank of China (PBoC) implemented a bigger than expected stimulus package last week, reducing reserve requirements for banks. The government also announced a reduction in deposit requirements for house purchases to try and boost sentiment on real estate. Increased tax reliefs for childcare and spending on education were also implemented to try and strengthen consumer finances. China’s property development firms continued to make headlines, with developer Country Garden warning they may default on upcoming bond payments following a loss of almost $7 billion in the first half of 2023.

Economic data in Japan generally pointed to softer economic growth, with unemployment rising by more than expected during July and business investment slowing. The government and the Bank of Japan (BoJ) issued a white paper which said that the economy is nearing an end to the deflationary pressures which have impacted Japan’s economy since the 1990s. Despite this, the BoJ are not expected to make any substantial changes to monetary policy in the coming months.

Bond traders appeared torn on whether the Bank of England (BoE) will continue hiking, whilst the central bank’s chief economist pushed back against market expectations for cuts in 2024, calling for interest rates to remain on hold until 2026.

Minutes from the ECB’s July policy meeting suggested that key figures at the central bank remained concerned about the uncertain outlook for inflation. Members of the bank’s policy committee felt “it was preferable to tighten monetary policy further than to not tighten it enough”.

GBP / EUR – Current 1.1683 Previous 1.1655

After a relatively volatile week, the Pound was broadly unchanged against both the US Dollar and the Euro, rising by 0.09% and 0.24% respectively. Currency traders were bullish on the Pound during the middle of the week, but gains were given up during Thursday and Friday’s sessions.