Sintra, a small town in the west of Portugal, hosted a three-day European Central Bank (ECB) forum that featured some of the key policymakers from across the world. ECB President Christine Lagarde was joined by US Fed Chair Jerome Powell, Bank of England (BoE) Governor Andrew Bailey and Bank of Japan (BoJ) Governor Kazuo Ueda. They exchanged views on current topics such as inflation and interest rates, while also sharing ideas about the future, including artificial intelligence (AI) and central bank digital currencies (CBDC).
Each policymaker gave their views on the impact that recent interest rate hikes have had upon economies and the rounding statement from US Fed Chair Jerome Powell certainly stood out from the rest. When asked if the US could reach the 2% inflation target in the next year, Powell voiced his concerns regarding core inflation, stating it would take until 2025 to reach the 2% target. “We will be restrictive as long as we need to be” is a message that worries investors as it is clear we have not yet seen the peak in rates. BoE Governor Bailey and ECB President Lagarde both indicated they are also prepared to continue with additional rate hikes.
On Thursday we saw better than expected US GDP growth for Q1 2023 rising to 2% from the 1.3% previous estimate. Strong consumer spending led GDP higher as it rose 4.2% for the quarter, the highest pace since Q2 2021. There was more positive US data as we saw initial jobless claims fall from 265,000 to 239,000, a sign of continued strength within the US economy despite the recent 50bps interest rate hikes by the US Fed since the collapse of Silicon Valley Bank. With such strong figures the chances of the “imminent” recession seem to be fading and the belief in a soft landing is becoming more prominent.
Eurozone inflation has been released this morning after countries such as Germany, Spain and France also released preliminary figures for June. Headline inflation fell to 5.5% from the previous 6.1% but core inflation (excludes food and energy prices) was the more worrying figure as it rose from 5.3% to 5.4%. Eurozone unemployment stayed resilient at 6.5%, matching the previous month of April’s reading. These figures are expected to be examined by the ECB ahead of next month’s meeting where we can be almost certain of another 25bps rise to interest rates.
Closer to home, UK GDP for Q1 2023 has been disappointing at 0.2%, falling from 0.6% the previous quarter. With falling GDP, the risk of a recession remains elevated as the squeeze on households will continue as interest rates have risen to a 15 year high of 5%. The full effect of the interest rate hikes are yet to be seen, especially as millions of homeowners will be coming off two-year fixed mortgages towards the end of the year and the jump in new rates will most certainly cut into a larger percentage of disposable income. The higher mortgage costs will be somewhat offset by falling energy and food prices which we should see over the coming months, as well as strong wage growth.
Nationwide house price data was released this morning and showed UK house prices dropped by 3.5% on an annual basis compared to June 2022. Nationwide stated that they expected the recent increase in mortgage borrowing costs to be a “significant drag” on housing activity. Although house prices have fallen on an annual basis, they are still marginally higher than compared to the start of 2022 and over 20% higher since the start of 2020. On a more cautious note, Zoopla reported an average 5% drop in asking prices for their listings, in a sign that prices may be adjusting against the backdrop of higher rates. More promising for the UK was OpenAI’s decision to locate their first non-US office here in London. OpenAI are the developers of ChatGPT, and the move is seen as a big vote of confidence in the UK’s ability to be at the heart of the AI revolution that is expected over the coming years.
Rounding up the week, our key message as ever stands, maintaining a long-term investment mindset to markets best allows to take advantage of the short-term instability. We will continue to blend asset classes in portfolios and take advantage of new opportunities, most recently purchasing direct UK gilts (government bonds). Diversification never goes out of style.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.