Jun 23, 2023 11:50:38 AM
Weekly Market Wrap 23/06/2023
The UK offered three significant surprises this week, as retail sales data, CPI data, and the latest monetary policy move from the Bank of England suggested no respite from the battle against inflation. Jerome Powell gives US investors further clarity on where the Fed’s monetary policy could go next, whilst the European economy looks to be feeling the affects of significant interest rate increases.
The UK market ended the week lower. UK inflation provided yet another upside surprise this week, as headline CPI was flat at 8.7% when economists had forecast a fall to 8.4%. Core CPI unexpectedly rose to 7.1% in May from a previous figure of 6.8%. Persistent high inflation within the UK has led to the Bank of England repeatedly raising interest rates, the latest CPI figures pushed BoE MPC members to deliver a larger than expected rate increase this week. The BoE raised the UK base rate by 50bps (when an increase of just 25bps was expected), taking the rate up from 4.50% to 5.00%, the highest level seen since 2008. Markets are currently pricing in a terminal rate for the BoE of 6.00% and investor fears over a recession in the UK are growing after the most recent surprise data. Retail sales data released on Friday, showed an unexpected jump in spending, with sales for May rising 0.3% when economists had expected a fall of 0.2%. Despite some suggestions that this data proved UK spenders were coping well with high prices, the additional bank holiday to mark the coronation of King Charles was not factored into seasonal adjustments.
The S&P 500 is set to end the week down 0.63% 4,381 and the NASDAQ is down 0.28% to 13,238. US initial jobless claims came in slightly higher than expected on Thursday (264k vs 260k estimate), remaining at elevated levels for a third consecutive week. Continued high levels of people claiming unemployment benefits could be a sign to the US Federal Reserve that recent interest rate increases are starting to cause softening within the US labor market. However, on Wednesday Fed Chairman Jerome Powell told US lawmakers when testifying that “Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” Markets are pricing in one further 25bps rate hike this year, with rate cuts expected in early 2024.
The Euro Stoxx 50 is currently down 1.83% at 3,959, the DAX is 2.98% lower at 15,869, whilst the CAC 40 has fallen 2.81% to 7,180. Eurozone PMI data slumped in June, with composite, services and manufacturing PMIs all falling by more than expected. This data showed that the slowdown of manufacturing in the European economy has deepened as the manufacturing PMI for June unexpectedly fell to 43.6 from 44.8, the lowest level seen since COVID. Euro zone government bond yields fell upon the release of this data, as investor expectations that the ECB may be required to ease off the pace of further rate increases grew.
Yields on 10-Year US government bonds rose by 0.03% this week to 3.79%, after hawkish commentary from Jerome Powell reaffirmed market expectations of a further rate increase at the Fed’s next meeting.
Brent Crude is set to end the week down 4.61% at $73 per barrel, after the UK’s surprise 50bps rate increase sparked concerns around receded demand and a potential recession.
The Week Ahead
Monday – No major news
Tuesday – US Consumer Confidence
Wednesday – BoE Chief Economist Speech
Thursday – US GDP & Initial Jobless Claims
Friday – UK GDP
*x% up/down to price as of last week’s close