Market Commentary 19th September 2023 – from William Binks

Data from the Office for National Statistics (ONS) showed that the UK economy shrank by a larger than expected 0.5% in July, following growth of 0.5% in June. Overall, the economy has grown by 0.2% in the three months to July 2023. The service sector had the biggest drag on the economy last month, whilst strikes in the NHS leading to cancellations in appointments and procedures also had an impact.

Labour market data showed that the unemployment rate rose to 4.3% in the months from May to July, the highest level since the 3^rd quarter of 2021. Despite the labour market continuing to cool, wages have grown at their fastest rate since records began in 2001.

The European Central Bank (ECB) met last week and voted to raise interest rates for the 10^th consecutive time to reach a 22-year high of 4%. Despite the increase the central bank has indicated they are likely finished with their current tightening cycle as inflation has started to decline in the Euro Zone.

An official data release on German economic sentiment recorded by the ZEW, one of Germany’s leading economic research institutes, pointed towards a general improvement in economic prospects. This has largely been driven by expectations of more stable interest rates in the Eurozone and around the globe.

The annual inflation rate in the US measured by the Consumer Price Index (CPI) rose for the second consecutive month in August to 3.7%, with gasoline prices on the rise again over the month (+10.5%). Core inflation, which strips out food and energy costs, slowed to 4.3% from 4.7% in the month prior.

Retail sales rose by 2.5% year-on-year in July on a nominal basis, pointing to robust consumer spending despite high prices and borrowing costs. Producer Price Index (PPI) data, which measures output prices from product and service producers rather than consumer facing businesses, indicated that year-on-year inflation was 1.6%.

Inflation data showed that consumer prices in China rose by 0.1% in the year to August. Prices of non-food items increased, whilst food costs fell at the same pace as the month prior. Producer prices dropped by 3% year-on year, the smallest deflation since March, amidst various government measures to boost consumption.

Japan saw little news throughout last week, but investors closely await the Bank of Japan’s next meeting to review their ultra-low monetary policy. The Bank of Japan Governor, Kazuo Ueda, said the central bank could end its negative interest rate policy when its 2% inflation target is in sight. Vehicle manufacturers Toyota (+5.58%) and Mitsubishi (+2.33%) both contributed to the Nikkei 225’s growth as the automakers benefited on sentiment on their shift to a focus in electronic vehicles.

Bond traders are largely anticipating a final 0.25% interest rate rise to 5.5% by the Bank of England next week, amidst rising wage inflation.

The yield on the 10-year German Bund continued to rise last week. Messages from the ECB were mixed, with hawkish rhetoric from key ECB officials, Robert Holzmann, Governor of the Austrian Central Bank, hinted at the possibility of an additional interest rate increase.

The US 10-Year Treasury yield is nearing a 16-year high as evidence of a resilient US economy ignites expectations for the Federal Reserve to maintain their high interest rates for a prolonged period.

GBP / EUR – Current 1.1612 Previous 1.1651

The Pound continued to lose value last week against major currencies, against the US Dollar the Pound fell by 0.69% and 0.33% against the Euro. A resilient US economy saw the greenback strengthen last week, with expectations for continued restrictive borrowing costs.