Weekly Market Wrap 12/05/2023

The Bank of England raised interest rates as expected, and issued a warning to markets that the fight against inflation was far from over, although it looks like the UK will avoid falling into a recession. Meanwhile, US economic data all pointed towards a Federal Reserve pause in interest rates and inflation remains the key issue in the Euro zone. China’s economic recovery appears to be losing steam, as new bank loans fell, consumer prices rose at the slowest pace in more than two years and imports unexpectedly contracted.

UK Market 

The UK market ended the week flat. The Bank of England raised interest rates by a further 0.25% as expected on Thursday, taking the UK base rate to 4.50%. Despite delivering a 12^th consecutive rate hike, BoE Governor Andrew Bailey told markets that the bank would “stay the course” in order to ensure inflation falls back to its 2% target. Bailey also stated that any future rate changes would be guided by economic data and further increases would be a possibility if inflation persists. Markets are still pricing in two further rate increases for the BoE, with rates estimated to hit 5% in 2023. UK GDP grew 0.1% in Q1 of 2023, meaning that the UK economy looks likely to avoid recession, however output fell in March unexpectedly, driven lower by businesses and individuals feeling the affects of higher interest rates.

US Markets

The S&P 500 is set to end the week flat at 4,130 and the NASDAQ is 0.99% higher at 13,389. US CPI data came in slightly below expectations this week, falling to 4.9% YoY, the lowest level since April 2021, when economists had predicted a flat reading of 5.0%. The prices of food rose at a significantly lower pace than in March, while energy costs fell across the month. Core CPI came in in-line with expectations at 5.5%, down from 5.6% in March, whilst the cost of housing slowed for the first time in over two years. Producer prices released on Thursday provided further evidence of slowing inflationary pressures, with PPI falling by more than expected to 2.3% (est. 2.4%) from 2.7%. Initial jobless claims came in above expectations, increasing to 264k (est. 245k), the highest level seen in over a year. This data will add to the case that the Federal Reserve should cease raising rates at the next meeting.

European Markets 

The Euro Stoxx 50 is currently up 0.51% at 4,053, the DAX is 0.21% lower at 15,926, whilst the CAC 40 has gained 0.29% to 7,454. Survey data released this week showed that Euro zone consumer inflation expectations increased, with inflation expected to be at 5.0% in one year, and 2.9% in 3 years. These expectations come despite rapid tightening from the ECB, which has yet to end its monetary policy action against inflation. Harmonised CPI data from Germany released this week saw inflation sticking at 7.6% YoY.

Fixed Income

Yields on 10-Year US government bonds were flat across the week at 3.41%, despite lower than anticipated CPI data this week. Yields did fall slightly on Thursday however, after producer price data fell in April, increasing the view that the Fed’s rate hikes are now over.

Commodities

Brent Crude is set to end the week down 1.29%, as OPEC’s oil production fell by nearly 200,000 bpd in April. US oil inventories unexpectedly rose this week, with 3.6 million barrels being added when a drop had been forecast.

The Week Ahead 

Monday – European Growth Forecasts

Tuesday – European GDP, China Retail Sales, US Retail Sales

Wednesday – Andrew Bailey Speech

Thursday – US Initial Jobless Claims

Friday – Germany Producer Price Data

*Price changes as of last week’s close unless stated otherwise.