Week ending 14th July 2023.

As shown in the accompanying table, markets experienced gains this week as investors responded positively to further signs of cooling inflation in the US. The prevailing sentiment reflected optimism regarding the economic outlook.

A report this week from the University of Michigan showed a significant increase in US consumer sentiment, further reinforcing positive economic expectations. In June 2023, the US’ annual inflation rate dropped to 3%, the lowest since March 2021 and below market forecasts of 3.1%. This slowdown can be attributed to a high base effect from the previous year (the method by which inflation is measured) when energy and food prices surged meant inflation reached highs of 9.1%. Energy costs specifically declined by 16.7% compared to May. While the rising cost of goods and services in the US has slowed to a two-year low, core inflation – excluding energy and food sectors – remains slightly higher. However, June saw the lowest core inflation rate since 2021, indicating a cooling of prices.

Latest data advanced markets this week with hopes that the central bank is nearing the end of its rapid rate rise cycle. US Policymakers are expected to raise interest rates by a quarter point at their upcoming meeting in July. 

In the UK, GDP in May was better than expected, with a slight contraction of 0.1% compared to a projected 0.4% decrease. The decrease in activity was caused by a series of bank holidays, including the King’s coronation. Considering the bank holiday and strikes, it becomes challenging to accurately assess the real state of the economy.

The Bank of England is set to raise interest rates again next month, driven by consistently high inflation, and this is expected to add pressure on households and businesses – impacting growth in the coming months. The repercussions of previous interest rate hikes implemented over the past 18 months are still unfolding. We would caution against tightening measures further, highlighting that consequences of previous rate increases takes time to materialise. We expect inflation to fall quickly in the coming months, partly due to base effects. Tightening policy excessively in response to past mistakes could pose a risk to the UK’s growth prospects.

In the upcoming week, earnings season will get underway, providing valuable insights into various sectors. The financial system’s response to a series of bank failures earlier in the year will be examined. Last week the largest banks in the US, JPMorgan and Wells Fargo, showcased the resilience of the economy with both consumers and businesses continuing to spend and borrow despite the rapid increase in interest rates. JPMorgan reported a remarkable 67% surge in profit for the second quarter compared to the previous year, while Wells Fargo’s profit rose by 57%. These gains were largely driven by higher rates that allowed the banks to earn more from lending. The impressive results momentarily overshadowed the earlier perceived banking crisis this year.

Data wise next week there is a slew of data from China with GDP, industrial production, retail sales and unemployment rate. From the US, we have retail sales, industrial production, Empire Manufacturing readout and another jobless claims update. In the UK we have the latest inflation data for June, consumer confidence and retail sales.

Kate Mimnagh, Portfolio Economist