It has been a week where the economic data has dominated headlines and led to a positive market mood
Particularly in the UK where the Bank of England (BoE) likely took a lot of pleasure in seeing inflation numbers for June come in lower than expected, for the first time in many months. As a result, UK assets performed strongly, with sterling and bond yields falling on expectations that the peak in UK rates will be lower than previously feared.
UK inflation numbers fell to their lowest level since March 2022, at 7.9% year-on-year, which was lower than expected and ended a five-month run where inflation came in higher than consensus expectations. While inflation remains high, this direction of travel saw a positive reaction in markets with property stocks in particular performing strongly as investors reassessed the path for interest rates.
Expectations that the BoE will hike rates by 50 basis points in August fell back, and longer-term expectations also fell, with the peak interest rate for the UK now expected to be less than 6%. Markets still expect almost 100 basis points of rate hikes between August this year and February next year, but hopes that the BoE will be less aggressive on rates saw sterling weaken against other major currencies.
The 7.9% CPI print for June was down from 8.7% in May and a peak of 11.1% last October. Core CPI, which excludes food and energy prices, was at 6.9% year-on-year, down from 7.1% in May and lower than expected. While energy prices have fallen back significantly, food price increases remain stubbornly high, with a year-on-year increase of 17.3% in June.
PPI numbers also give hope for a further easing on inflation in future months, with PPI input prices down 2.7% year-on-year – the first negative reading since 2020. Output prices were up only 0.1% year-on-year. The easing in CPI will come as a relief to the BoE, with inflation falling back into the glide path the Bank expected.
Nevertheless, while the latest numbers do suggest the BoE may not need to be quite as aggressive as previously feared, the path for UK rates still appears to be higher, with the Bank likely to keep rates at an elevated level for as long as it can to continue to squeeze inflation. The bank will, however, need to be equally mindful of the economic consequences of keeping rates at what will feel like a painful level for an extended period.
We also saw the monthly “data dump” from China which included the second quarter growth numbers, which wereexpected to be strong as the economy continued to rebound after Covid-19 restrictions came to an end at the start of this year. While growth of 6.3% looks solid, it was well below the 7.3% expected, but showed stronger momentum than the 4.5% seen in the first quarter. The quarter-on-quarter data highlighted the sluggish pace of growth, with the economy increasing by only 0.8%. Retail sales growth also slowed to 3.1% year-on-year from 12.7% in May, again below expectations.
Industrial production increased by 4.4%, well ahead of expectations, giving some hope there is a little more balance to Chinese economic growth, with the post-Covid recovery previously having been driven primarily by consumption and the service sector, with manufacturing in the doldrums.
The Chinese National Bureau of Statistics noted that weakness elsewhere in the global economy was weighing on the sector, with the dollar value of Chinese exports down more than 12% in June, the biggest drop since the height of the Covid pandemic in 2020.
The property market also remained weak, with sales of flats down 27% in June compared to a year ago. The unemployment data showed a further increase in youth unemployment, to 21.3%, though the overall unemployment rate remained unchanged at 5.2%, below the official target of 5.5%.
With the noise around stimulus intensifying, the focus is on the Politburo meeting at the end of this month, which will decide economic policies for the rest of the year. However, with a growth target set at a modest 5% for 2023, the numbers may not yet be bad enough for the authorities to move to widespread stimulus. There appears to be a desire for a lending and spending spree in an already indebted economy, not least at the local government level where a huge amount of debt is not recorded on official balance sheets.
Japan also reported inflation numbers this week, with CPI for June at 3.3% year-on-year, slightly ahead of expectations. The CPI numbers excluding food and energy costs eased to 4.2%. CPI in Japan has been above target for 15 consecutive months, having previously only been above target prior for 17 months in the past 20 years. Earlier in the week, Bank of Japan (BoJ) governor, Kazuo Ueda, indicated the central bank will maintain its ultra-loose monetary policy as it still has some way to go to sustainably achieve its inflation target. Ueda stressed the need for patience, stating that the Bank will only consider tightening when inflation is driven by domestic demand and higher wage growth.
The BoJ appears more than happy to allow inflation to run ahead of target after a couple decades of deflation. This policy appears aimed at allowing inflation to become part of consumers’ and companies’ mindsets so that spending is not continually deferred in expectation of lower prices. Ueda stressed the need for patience and has stated that the Bank will only consider tightening when inflation is driven by domestic demand and higher wage growth.
Markets have grown comfortable with the near stalemate in the war in Ukraine, but this week saw a few headlines to remind investors of potential risks to commodity supplies. Russia withdrew from the grain supply agreement earlier in the week, with the Defence Ministry stating that cargo ships heading to Ukrainian ports would be considered as potentially carrying military cargo with vessels “considered to be involved in the conflict on the side of the Kyiv regime”.
Russia has also launched air strikes on Ukrainian ports and grain depots this past week. These actions serve as a reminder of the importance of Ukraine to global wheat supplies, and also that Russia still has the potential to weaponise commodity supplies to try and impact “unfriendly” nations. The wheat price is up more than 10% this week but is still lower than at the start of the year, and thankfully way below levels seen in the spring of last year.
Have a good weekend, hopefully the weather holds off enough for a positive result in the cricket for England!
Kind regards,
Anthony.
