Weekly Market Wrap 11/08/2023

UK GDP in Q2 surprised markets this week, whilst key inflation readings in the US, China and Germany offered a mixed set of results. UK CPI data is expected next Wednesday, which will be key to determining the Bank of England’s next move.

UK Market  

The UK market ended the week lower. The UK economy unexpectedly grew in Q2 of 2023, GDP increased by 0.2% and was led by strong manufacturing activity. However, the positive GDP news opens the door for the Bank of England to continue raising interest rates as a stronger UK economy would be perceived as more able to withstand further rate hikes. UK markets headed lower on Friday morning after the news, whilst yields on gilts rose. Markets are now pricing in a terminal rate for the BoE of 5.75%, with no cuts forecast until Q3 of 2024. UK CPI data will be released next Wednesday, with economists forecasting a significant drop in headline data (6.7%, falling from 7.9% in June). A strong decline in inflation could present the Bank of England with a difficult decision.

US Markets

The S&P 500 is set to fall by 0.21%, whilst the Nasdaq looks set to end the week 0.96% lower. Much anticipated US inflation data came in lower than expected this week, headline CPI rose by 3.2% (when an increase of 3.3% had been forecast, whilst core CPI unexpectedly fell to 4.7%. The largest contributor to inflation was shelter costs, which came in 7.7% higher YoY. This reading has strengthened the case for the Fed to hold interest rates at the current level at the next meeting as inflation shows continued progress in returning to target levels. Markets were boosted on Thursday after hearing the news, interest rate markets are still not pricing in any further rate hikes, however there will be a further CPI reading before the Fed meet in September which could change the FOMC’s course.

 European Markets 

The Euro Stoxx 50 is currently up 1.23% this week. German CPI came in as expected at 6.2%, easing slightly from June’s reading of 6.4% however still above the reading for May. Despite inflation still well above the 2% target rate in Europe’s biggest economy, slowing economic activity in the eurozone has led to the European Central Bank leaning towards a pause in interest rate movements. Markets are currently pricing in one 0.25% rate increase in 2023, before at least one cut is expected in 2024. UBS shares rallied on Friday after it was announced that it will not require a previously agreed government guarantee for its takeover of Credit Suisse.

 Fixed Income

Yields on US 10-year bonds were flat at 4.09% this week, whilst UK 10-year yields rose by 0.10% on Friday to 4.45% as higher GDP data increased rate hike expectations.

 Commodities

Brent crude was steady across the week at $86 per barrel, falling on Friday after a report from the International Energy Agency which stated that growth in oil demand will be slower than previously expected, driven by worsening macro conditions and the uptake of electric cars pushes.

The Week Ahead

Monday – Japan GDP

Tuesday – US Retail Sales

Wednesday – UK CPI & FOMC Minutes

Thursday – US Initial Jobless Claims

Friday – UK Retail Sales & European CPI

*x% up/down to price as of last week’s close