Market Activity
June 19, 2023
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A rebound in UK economic growth and stronger-than-forecast labour market data supported market expectations that the Bank of England would continue raising interest rates in July.
The economy grew 0.2% sequentially in April, after contracting 0.3% in March. Increased output in consumer-facing services, car sales, and education drove the gains.
Separately, annual average wage growth, excluding bonuses, climbed to 7.2% in the three months through April, while the unemployment rate receded to 3.8% after rising to 3.9% in the three months through March.
BoE Governor Andrew Bailey told the House of Lords Economic Affairs Committee after the figures were released that the labour market was “very tight.” He added: “We still think the rate of inflation is going to come down, but it’s taking a lot longer than we expected.”
Europe:
The pan-European STOXX Europe 600 Index rallied 1.47% last week as the U.S. Federal Reserve refrained from raising rates this month. Hopes that China might implement stimulus measures likewise appeared to lift stocks. Major equity indexes also advanced. Germany’s DAX gained 2.56%, France’s CAC 40 Index tacked 2.43%, and Italy’s FTSE MIB climbed 2.58%. The UK’s FTSE 100 Index added 1.06%.
The 10-year German government bond yield climbed above 2.5% after the European Central Bank raised interest rates and signalled more tightening was likely. Swiss and French yields also headed higher. Short-end UK gilt yields surged to their highest levels since 2008 after data showed UK wages increased more than expected in April, fuelling expectations of a further increase in borrowing costs.
The ECB raised its key deposit rate by a quarter-point to 3.5%—the highest level in 22 years. ECB President Christine Lagarde said after the meeting that policymakers “still have ground to cover” and that they would probably tighten borrowing costs again in July unless there was a “material change in the baseline outlook.”
The ECB also raised its forecasts for headline and core inflation across the three-year time horizon, strengthening the case for continued monetary tightening. The central bank also pared its estimates for economic growth. As part of an effort to shrink its balance sheet, the ECB confirmed that it would stop reinvesting the proceeds of its asset purchase program in July.
Industrial production in the eurozone rebounded by a greater-than-expected 1.0% in April due to a strong increase in capital goods output.
Meanwhile, investors in Germany were slightly less pessimistic in June. An economic sentiment index compiled by the ZEW research institute came in at -8.5 points, up from -10.7 points in May.
United States:
The rally continued on calming inflation fears.
Favourable inflation and growth signals appeared to help stocks continue a rally that began with only a few interruptions in late May. The S&P 500 Index notched its longest stretch of daily gains since November 2021 and its best weekly performance since the end of March. The market’s advance narrowed a bit, however, as reflected in the renewed outperformance of growth stocks and large caps.
While falling producer prices partly reflected an ongoing contraction in the manufacturing sector (as well as a substantial drop in food and gasoline prices), investors received some good news on the consumer side of the economy. On an overall basis, retail sales rose 0.3% for the month and 1.6% over the past 12 months, marking the first year-over-year increase since January.
Excluding the volatile auto and gasoline segments, sales rose 0.4% in May. Meanwhile, the University of Michigan’s gauge of consumer sentiment rose more than expected and hit its highest level in four months. Weekly jobless claims were unchanged, however, defying consensus expectations for a decline from the previous week’s 20-month high.
The hopeful inflation data may have helped investors absorb a somewhat hawkish outlook from Fed policymakers. On Wednesday, officials announced that they were holding the official federal fund's target rate steady in the 5.00% to 5.25% range.
However, the “dot plot” summarizing each policymaker’s rate expectations suggested that this was more of a “skip” than a durable “pause” in their rate-hiking schedule, as the median rate projection suggested two more quarter-point hikes by the end of the year.
This week will be a shortened trading week with U.S. markets closed today for the Juneteenth holiday. We’ll see some important figures in the UK in the form of inflation and interest rates.
Inflation (including food and energy) was at 8.7% year on year in April, more than 4x the BOE’s 2% target. Core inflation rose to 6.5% year on year and 1.3% month on month (the fastest monthly pace in over three decades).
Even if we’re pleasantly surprised with soft inflation figures, the BOE will likely need to hike a little more before finishing but we should learn a little more about their intentions later this week.
In the US we’ll get the latest updates on the housing market, including building permits and housing starts for May, and the NAHB’s Housing Market Index for June. On Wednesday and Thursday, Federal Reserve Chair Jerome Powell will testify before Congress, as part of his semi-annual testimony on monetary policy. On Friday, S&P Global will release its latest Purchasing Managers’ Index (PMI) reading for June. FedEx, Accenture, Darden Restaurants, and BlackBerry are scheduled to report earnings.
This week’s figures:
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