Market Commentary 11th September 2023 – from Charlie Hancock

The Bank of England (BoE) governor, Andrew Bailey, told a parliamentary committee last week that he thought the central bank was “much nearer” to the top of the interest rate cycle. Bailey appeared to leave the door open to a further hike at their upcoming September policy meeting, but acknowledged that “the judgments now are much finer”.

A business survey conducted by the BoE between June and August showed that on average, firms expected to raise their prices by 4.9% over the next 12 months, which was the smallest expected increase since February 2022. Businesses also expect wage growth to slow over the next year.

Eurozone economic data continued to point to recessionary conditions, casting doubt on whether the European Central Bank (ECB) will hike interest rates at their September policy meeting. The European Union (EU) statistics agency revised their Gross Domestic Product (GDP) growth figure for the 2^nd quarter of 2023 from 0.3% to just 0.1%. Retail sales volumes across the Euro area declined by 0.2% in July vs the previous month and by 1.0% year-on-year, with discretionary consumer spending weakening.

German economic data was bleak, with industrial production declining by more than expected in July, marking the third consecutive month of shrinking output. New orders declined by 10.7% vs the previous month, which was the biggest decline since the early stages of the coronavirus pandemic in April 2020.

US economic data was generally better than expected last week, with a Purchasing Managers’ Index (PMI) for the services sector indicating that activity rose at a stronger pace in August vs the previous month. The manufacturing index remained in contractionary territory for the tenth month in a row. Data on the US labour market provided mixed signals, with weekly jobless claims coming in lower than expected, whilst the unemployment rate rose from 3.5% in July to 3.8% in August.

Economic data in China painted a mixed picture. Whilst exports and imports contracted by 8.8% and 7.3% respectively year-on-year, the declines were not as severe as economists expected. Data compiled by HSBC showed that the value of exports from China to Southeast Asia now exceeds the value of exports to the US or Europe. Chinese property developer Country Garden narrowly avoided a default last week, making bond payments just before the deadline. The cash strapped firm needs to meet bond payments of almost $2 billion before the end of 2023 and the risk of default therefore remains high.

A downward revision to Japan’s 2^nd quarter economic growth data appeared to knock investor confidence during the week. The data also cast doubts on whether the Bank of Japan (BoJ) will be able to start tightening monetary policy after decades of ultra-low interest rates. Japanese Prime Minister Fumio Kishida reportedly spoke to senior officials from China regarding the Fukushima nuclear wastewater dispute. Kishida reportedly called for Beijing to scrap the ban on seafood imports.

Bond traders appeared divided on whether the Bank of England (BoE) will pause interest rate hikes this month. Although recent data has pointed to an economic slowdown, wage growth and core inflation remain at elevated levels.

Many analysts expect the European Central Bank (ECB) to proceed with a 0.25% hike at their September policy meeting, citing recent weakness in the Euro vs the US Dollar and a re-acceleration in consumer price inflation for some Eurozone countries.

GBP / EUR – Current 1.1651 Previous 1.1683

The Pound lost ground against most major currencies last week, falling by 0.97% against the US Dollar and 0.27% against the Euro. With incoming data showing the US economy is currently faring better than other developed nations, the Dollar moved higher over the week.