Market Commentary 15th July 2024 – from Charlie Hancock

Data showed the UK economy expanded by 0.4% in May, after stagnating during a weaker than expected April. The services sector was the main contributor to the month’s growth, with infrastructure and housebuilding also seeing an improvement in activity.

Credit Ratings agency Fitch stated last week that the UK’s prospects for economic growth have improved following the election, with Fitch stating that the election result will provide “near-term political stability”.

Economic data for the Eurozone generally pointed to weak growth. German factory orders declined by 1.6% in May, which was much worse than expected given the median economist estimate pointed to an increase of 0.5%. A Purchasing Managers’ Index (PMI) for the construction sector across the Eurozone indicated that the downturn in the sector accelerated during June.

Meanwhile, wage inflation data published by jobs website Indeed showed that wages for advertisements in the Eurozone rose by 4.2% year-on-year in June. The annual increase was higher than the level recorded for May and the data prompted some concerns regarding wage growth contributing to inflationary pressures in the coming months.

Investors paid close attention to inflation data in the US, which showed that the headline rate for year-on-year consumer price increases slowed to 3% in June. On a month-on-month basis, consumer prices declined by 0.1%, marking the first decline in prices since the lockdown period in 2020.

The month-on-month decline in prices contributed to rising expectations for the Federal Reserve to cut interest rates at their September policy meeting. The Fed chairman, Jerome Powell, testified to Congress last week, with Powell’s comments also fuelling expectations for a rate cut. Powell stated that holding interest rates too high for too long would threaten economic growth and jobs, whilst adding that the US is “no longer an overheated economy” with the labour market “fully back in balance”.

China’s trade surplus rose to an all-time high during June, with exports rising whilst imports declined. Weak growth in domestic sectors such as housebuilding contributed to China exporting record levels of iron and steel. Rising exports of cheap steel from China have prompted concerns from steel producers elsewhere around the globe, with countries in South America imposing tariffs on Chinese steel as a result. Trade tensions appeared to worsen again last week after Beijing launched a probe into the European Union’s trade barriers.

Further weakness in the Japanese Yen continued to make headlines during the week, amidst growing speculation that authorities in Japan were preparing to launch another round of intervention in currency markets. The Yen has lost 11% of its value versus the US Dollar in the year to date, which has prompted concerns around rising import costs.

Bank of England (BoE) policymakers pushed back against calls for interest rate cuts last week, with the bank’s chief economist, Huw Pill, stating that key drivers of inflation were still strong. Other BoE policymakers expressed concerns regarding the level of services inflation present in the economy.

GBP / EUR – Current 1.1909 Previous 1.1821

The Pound rose to a 12 month high against the US Dollar last week, gaining 1.35%. Against the Euro, the Pound rose by 0.74%, reaching the highest level since August 2022. Sentiment on the Pound continued to improve following the General Election result.