This week

In another sign that the world continues to normalise after the Covid Pandemic, Transport for London announced this week that the number of trips made on the London underground has returned to about 90% of where it was back in 2019. Figures for this April showed 91 million Tube journeys were made, compared with 101 million for the same month during 2019. With such an increase in those riding the tube again, this week highlighted just how much was also on the line for financial markets, as a host of economic data releases gave economists plenty to get on board with.

Where better for the first stop of this week’s journey than Oxford Circus on Tuesday, as the British Retail Consortium released its Retail Sales Monitor data, measuring high street shop sales on an annual basis. With growth of 3.7% versus estimates of 5.2%, it seems the recent additional bank holiday did little to tempt shoppers to open their wallets, with sales growth slowing to its lowest level in six months. However, food sales did get a boost from the Coronation weekend, although this was not sustained for the rest of the month, with consumers reverting to tightening their belts and looking for own brand products.

As any Londoner will tell you, if you stay on the Central Line and go west from Oxford Street, you’ll arrive at Bond Street next. Indeed, bonds came into sharper focus for investors by Thursday as data showed that US jobless claims had soared over the past week. With signs that the persistently strong US labour market is beginning to show cracks, it was something of “mind the gap” as 261,000 signed on for unemployment insurance this week compared to estimates of just 236,000. The numbers left has now led market participants to price in a probability of 73% that the central bank will maintain the status quo.

Investors took the spike in unemployment levels as a sign that recession could be on the way, with the two-year US Treasury yield, a barometer for where the market perceives future Fed policy, dropped 5.2 basis points to 4.498%, while the yield on benchmark 10-year issues slid 3.1 basis points to 3.753%.

If you pay a visit to London’s Square Mile financial district, chances are you’ll arrive at either Bank or Monument, two stations that are actually linked underground. The two certainly bore more than a connection this week in Canada, as in a monument to how persistent inflation has affected policy, the Bank of Canada made the surprise move to raise its base rate to a 22 year high of 4.75%.

The central bank had been on hold since January to assess the impact of its previous hikes, after raising borrowing costs eight times since March 2022 to a 15-year high of 4.50%, the fastest tightening cycle in the bank's history. Surprisingly strong consumer spending, a rebound in demand for services, a pick-up in housing activity and a tight labour are all still making for an overheating economy.

Noting an uptick in inflation in April and the fact that three-month measures of core inflation remained high, the Bank of Canada said that "concerns have increased that CPI inflation could get stuck materially above the 2% target."

Our final stop this week takes us to Leicester Square Station, just a short walk away from Chinatown. Rounding off the week, inflation data for the world’s second largest economy showed that prices rose 0.2% annually, increasing from a 0.1% rise in April but missing a forecast for a 0.3% increase. However, the prices producers pay for their materials, fell for an 8th consecutive month, down to 4.6%, the fastest decline since February 2016 and bigger than the 4.3% forecast.

It is worth remembering that China's economy grew faster than expected during the first quarter, but with recent indicators showing demand is rapidly weakening with exports and factory activity falling, it could be the end of the line for the government’s tighter monetary policy as pressure grows to cut rates.

 

Next week

The coming week brings with it a host of economic data, so much in fact, that economists will have a job on their hands keeping up.

Indeed jobs, or rather those seeking them, will be the order of the day on Tuesday as the Office for National Statistics releases its Unemployment Claims data. Detailing the change in the number of people claiming unemployment-related benefits during the previous month, the data acts as one of the first monthly indications of the employment situation here in the UK and will be watched very closely by the Bank of England (BoE). With a persistently robust labour market fuelling the highest levels of inflation among western economies, the central bank will perversely be looking for a tick up in those out of work as a marker of a slowing economy.

Accompanying the unemployment data will be domestic average hourly earnings numbers, another key forward indicator of inflation. The numbers should also make for fascinating reading with breakdowns as to which industries have enjoyed pay rises and which are finding it more difficult to negotiate higher remuneration.

Allowing us to further understand what kind of shape the UK economy is in, Wednesday gives us UK GDP numbers, perhaps the broadest measure of an economy’s health. Measuring the change in the total value of all goods and services produced by the economy monthly, the data will again be invaluable for the BoE, having first predicted a deep recession last year, followed by narrowly avoiding such a fate this year.

We also get given the full works in the US this week too, with Tuesday also giving us their inflation data, whilst Wednesday delivers the Federal Reserve’s latest rate announcement, accompanied by a press conference giving their views on the future of the world’s largest economy. With economic data being mixed at best over the last month, many market participants are now expecting the Fed to pause their rate hiding trajectory for their next meeting, taking “a wait and see” approach to analyse the data further.

As the sun sets on another week, Friday will see investors look towards the land of the rising sun, as Japan releases its views on future rate policy and the state of the Japanese economy. Expected to keep its ultra lose policy for a while longer yet, many will be watching for any hints as what the central bank will do, especially as the Japanese market hits a 33-year high.

 

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used, you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding as at 09 June 2023.