Last week we entered the month of July but seemed to miss the opportunity to mention a famous fact about the month. July was renamed in honour of Julius Caesar, who was born in July, changing it from the previous name Quintilis. The historic facts keep coming as we are just days away from the 54th anniversary of Apollo 11, the first spaceflight to land on the moon.
The UK unemployment rate for the month of May was released on Tuesday, coming in at 4%. This was a rise from the month before (3.8%) and if we were analysing this data alone we would assume that the UK labour market has begun to weaken. However, strong wage growth put things into perspective as we have seen a 7.3% (excluding bonuses) jump in wages in the three months to May. This is the highest release since the report began in 2001 and could be enough to convince the Bank of England (BoE) to further raise interest rates as they fear a wage-price inflation spiral could ensue. Yields on the two-year government bond initially rose at the start of the week on the back of this strong wage data.
On a more positive note, US inflation has continued to descend with headline inflation down to 3% (year-on-year) and core inflation (excludes food and energy prices) falling to 4.8%. Both the fall in headline and core inflation were greater than consensus expectations. A significant drop in inflation was a result of the fall in energy prices which rose in 2022 after Russia’s invasion of Ukraine but has since dropped 16.7% over the last year. The US Fed’s decision to pause rates at the last meeting was a calculated decision in order to determine the impact the rate rises had on the economy to date. Although there are signs that the economy has responded to the significant interest rate hikes, the US are still shy of the 2% target, and we could see the Fed raise rates further in order to get over that line.
US Producer Prices Index (PPI) rose 0.1% in the month of June and were also up 0.1% on a year-on-year basis, further encouraging signs that inflation in the US could continue to fall. PPI measures the costs of goods for manufacturers; if their input costs are not increasing there is little need for the manufacturers to increase the price of finished goods. The PPI increase was the smallest year-on-year rise since August 2020.
The better-than-expected US inflation and US PPI data acted as a boost to both equities and bonds, and the impact was felt across the pond with UK assets also joining the party. This week we have seen Morgan Stanley release a note stating that UK equities and credit are the cheapest in the world. They suggested that falling inflation in the second half of the year could act as a catalyst for a re-rate of UK assets.
The risk-on nature of markets, coupled with an expected imminent end to the US Fed hiking cycle led to the US Dollar weakening against most major currencies, including sterling. We have seen the rate reach new 15-month highs of $1.31. A firmer UK currency is normally associated with stronger domestic equity performance. It’s worth noting as well that import prices should come down as the currency appreciates, which would help the battle with UK inflation.
China’s post pandemic recovery is quickly losing steam and the central bank have been called upon to use policy tools such as medium-term lending facilities in order to weather the storm. China’s exports fell at their fastest pace, down 12.4% in June as the global demand for goods falls. Exports to the US are the top destination for Chinese goods however they have fallen significantly, and domestic consumption is sluggish. The Chinese government set a GDP growth target of 5% this year after falling short in 2022, however, expectations for the economy heading into Q3 2023 are being revised downward. China year-on-year PPI data came in at -5.4% this week. The fall in factory gate prices could see China effectively exporting deflation to the rest of the world as the prices of their goods falls.
Rounding up the weekly, we have certainly had more positive news this week, particularly around US inflation, resulting in a bounce back in markets. As always we maintain the necessity for diversification within portfolios in order to benefit from market moves, while also aiming to protect portfolios from heightened volatility.
Nathan Amaning, Investment Analyst
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