Weekly Market Wrap 19/05/2023

The G7 meet as Zelensky prepared to join them in Hiroshima. German shares near a record as inflation and the US debt ceiling again dominated investor sentiment.

UK Market 

The UK market ended the week slightly positive. UK wage data for March 2023 was released this week, the report showed that the average private sector wages had increased by 6.7% YoY, whilst UK unemployment jumped to its highest level in over a year (3.9% vs 3.8% est). The continued push higher in wages is feared by the Bank of England to be fuelling higher inflation, as another increase in UK unemployment has opened the door to conversations of an interest rate pause for the Bank of England. Despite this, UK consumer confidence rose for the fourth consecutive month in May. UK CPI will be released next Wednesday, with markets hoping to see a clear fall in inflation after seven consecutive readings above 10%. Another rate increase is expected at the June meeting for the BoE, with the base rate expected to raise 0.25% to 4.75%. Andrew Bailey commented on Wednesday that rates would be lifted as far “as necessary” to get inflation towards the BoE’s target level.

US Markets

The S&P 500 is set to end the week up 1.79% at 4,198 and the NASDAQ is 3.71% higher at 13,834. Investor concern over a potential US government default has subsided after President Biden and congressional Republican Kevin McCarthy reinforced their stance, that agreeing a deal on raising the debt ceiling was a top priority. The news that an agreement was likely, pushed US markets higher, with the momentum supported by US jobs data. Initial jobless claims came in below expectations (242k vs 254k est), boosting investor optimism that the US economy could be able to withstand the Fed’s increased interest rates.

European Markets 

The Euro Stoxx 50 is currently up 0.86% at 4,075, the DAX is 2.18% higher at 16,258, whilst the CAC 40 has gained 1.00% to 7,489. The short term outlook for the European Union economic growth was lifted on Monday, with the 2023 estimate rising to 1.0% from 0.8%, whilst the 2024 estimate rose from 1.6% to 1.7%. A key driver of the increased growth is rapidly falling energy prices in Europe, with lower energy bills working their way into the economy for businesses and consumers. German consumer prices rose by more than expected in April, increasing by 4.1% YoY (est 4.0%), however this was the smallest increase since April 2021, a clear showing that price inflation is rapidly falling back to more sustainable levels.

Fixed Income

Yields on 10-Year US government bonds jumped by 0.19% this week to 3.65%, after two Fed policy makers said inflation is not cooling fast enough, reopening the door to potential further hikes. Markets are currently pricing in a 33% probability of another rate increase in the June meeting.

Commodities

Brent Crude is set to end the week up 3.28%, as markets gained optimism over the movement towards a resolution of the US debt ceiling issue.

The Week Ahead 

Monday – PBoC Interest Rate Decision

Tuesday – European Composite PMI

Wednesday – UK CPI, FOMC Minutes

Thursday – US GDP, Initial Jobless Claims

Friday – UK Retail Sales, US Consumer Sentiment

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