This week

With summer having seemingly come from nowhere this week, it’s finally time to enjoy the warm weather and all the traditions it brings; waking up at 5am to get a spot at the nearest beach, smearing on the factor 50 and searching for the fan you placed somewhere back in the loft during September. There is one other tradition to really enjoy the great British summer with though, a game of cricket in the sun. With investing and test matches both seeing their fair share of ebbs and flows, the past week has acted as the perfect preparation for investors.

Opening the week, UK claimant count and unemployment numbers provided some challenging overhead conditions for the Bank of England (BOE) to navigate, showing that the sun still shines on the domestic labour market. Data from the Office of national Statistics (ONS) showed a drop in unemployment to 3.8% from last month’s 3.9%, below estimates of 4%. Not only this, but private sector pay growth surged to 7.6% in April, the fastest rate in 20 years, excluding the pandemic, raising expectations that the BoE will have continue to raise rates to quell rampant inflation.

BoE predictions from last year that the UK economy would slip into recession also now seem pretty wide of the mark, with the central bank admitting that they were a bit too pessimistic over how robust the labour market would prove. Defined as two consecutive quarterly declines in Gross Domestic Product (GDP) the UK economy grew at 0.2% between March and April, proving yet again how robust it has been, driven on by the services sector, which expanded 0.3%.

Whilst inflation has also enjoyed a good innings over in the US, price rises in the world’s largest economy are beginning to fall more significantly, as highlighted by Tuesday’s Consumer Price Index numbers. Climbing by 0.1% monthly for May, prices barely rose, resulting in the smallest increase in annual inflation in two years. Whilst the numbers actually came in below consensus estimates, core CPI, which strips out volatile sectors such as food and energy, actually rose by 5.3% on an annual basis, padded out by the rising cost of second-hand cars, supporting the view that the Federal Reserve would be compelled to carry on driving up rates.

Such suspicions were confirmed during the middle of the week as the Fed hit investors for six with a surprisingly hawkish rate outlook. Choosing to pause its hiking cycle for this month, the bank signalled that borrowing costs will likely rise by another 0.5% by the end of this year, in reaction to a stronger-than-expected economy and a slower decline in inflation. However, policymakers also mentioned that they anticipated 1% of rate cuts in 2024, alongside fast-falling inflation. After the announcement, U.S. stocks fell before regaining their poise, with futures pointing to a 75% chance of a rate hike next month, with the probability of a late cut by the end of the year dropping.

At the tail end of the week, it was more like French cricket as Christine Lagarde, the President of the European Central Bank (ECB) raised rates on the continent to a 22-year high. Citing, stubbornly high inflation and all but guaranteeing another move next month and likely beyond that too. Rising by another 0.25%, to 3.5% with Lagarde commenting that:

"Barring a material change to our baseline, it is very likely the case that we will continue to increase rates in July… Are we done? Have we finished the journey? No. We're not at our destination. Do we still have ground to cover? Yes, we still have ground to cover."

Despite such warnings, global markets reached a 14-month high by Friday. Much like cricket it seems, it’s all in the delivery…

Next week

After such a busy week of data releases and central bank press conferences last week, global markets could be afforded something of a summer break with a quieter than usual few days coming up.

The coming week could well be defined on domestic shores during Wednesday as the Office for National Statistics releases it UK inflation data. Ironically falling on the day of the summer solstice, it could be a very long day indeed for the Bank of England (BoE) if the recent trend of inflation coming in well above expectations continues. With the BoE virtually assured to raise rates further, many economists will be examining the data to not only see if the headline level of inflation is falling but also changes in the core measure, a reading which strips out the volatile fuel and food sectors.

The following day will see the BoE most probably announce a 0.25% rate hike, as well as giving their views on the domestic economy and forward guidance as to what they may do next in terms of borrowing costs.

It won’t be just the Andrew Bailey and the BoE that come out this week, with their American counterparts also making an appearance. Jay Powell, Chair of the US Federal Reserve, is due to testify about the Semi-Annual Monetary Policy Report before the House Financial Services Committee, in Washington DC and could well give some future hints as to his views on the economy.

The end of the week brings us a raft of PMI data from all over Europe, as well as in the UK and US. Covering both the Services and Manufacturing sectors, PMI readings prove so useful to economists due to the data acting as leading indicator of economic health. Businesses usually react quickly to market conditions, with their purchasing managers holding perhaps the most current and relevant insight into the company's view of the economy.

 

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 16 June 2023.