July 17, 2023
UK economic output falls less than expected and the FTSE 100 had a solid week.
The UK economy shrank 0.1% sequentially in May after expanding 0.2% in April, the Office for National Statistics said. Economists had expected a contraction of 0.4%, according to a poll of economists by FactSet. On a rolling three-month basis, gross domestic product grew 0.1%.
The figure was better than the monthly drop of -0.3% expected by economists, who have been wrong pretty much every month for the last year. The economy seems to have flatlined, but given what’s going on, this is hardly surprising and if inflation starts to fall soon, we might avoid a recession altogether.
However, one thing that we simply can’t seem to shake in the UK is wage growth and this week it hit record levels.
Excluding bonuses, UK wages grew at a record annual pace of 7.3% in the three months through May. However, the labour market showed signs of easing, with the jobless rate ticking up to 4% from the 3.8% recorded in the three months to April.
Over in Europe, the STOXX Europe 600 Index ended the week 2.95% higher—the biggest weekly gain in about three-and-a-half months. Signs of cooling inflation in the U.S. suggested that interest rates may soon peak.
Meanwhile, China extended support measures to the property sector, raising hopes that additional economic stimulus could be forthcoming. Major stock indexes advanced. France’s CAC 40 Index climbed 3.69%, Germany’s DAX added 3.22%, and Italy’s FTSE MIB gained 3.19%. The FTSE 100 lagged a little with a gain of 2.45%.
European government bond yields fell as slowing U.S. inflation raised expectations that the Fed is nearing the end of its policy tightening cycle. UK bond yields also declined, but robust wage data appeared to cushion the drop.
The minutes of the European Central Bank’s (ECB) June meeting showed support for further rate increases amid concerns about persistently high inflation. “It was seen as essential to communicate that monetary policy had still more ground to cover to bring inflation back to target promptly,” the minutes said, adding that increases in “interest rates beyond July” could be considered “if necessary.” However, most policymakers backed chief economist Philip Lane’s argument that they should follow a “meeting-by-meeting approach, particularly as rates were moving closer to a possible peak level.”
Stocks in the US recorded a week of strong gains, as investors welcomed data showing a continued cooldown in inflation. The S&P 500 Index ended the week 6.50% below the all-time intraday high it established in early 2022.
The Nasdaq Composite recorded an even stronger gain but remained 12.94% below its record peak. Standout performers within the S&P 500 included casino operators, along with regional banks and asset managers. Laggards included some major pharmaceutical firms and the typically defensive consumer staples sector. Friday saw the unofficial start of earnings season, as bank giants Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo reported second-quarter results.
The signal event of the week appeared to be Wednesday’s release of consumer price index (CPI) inflation data. Both headline and core (excluding food and energy prices) inflation rose 0.2% in June, a tick below expectations. The annual increase in headline inflation slowed to 3.0%, its slowest pace since March 2021, while core inflation slowed to 4.8%, the slowest since October 2021.
Producer price index (PPI) inflation data, released Thursday, was arguably even more encouraging. Headline producer prices rose only 0.1% over the year ended in June, nearing deflation territory. Core producer prices rose 2.4% over the period, but near the Federal Reserve’s overall inflation target of 2.0% and at their slowest pace since January 2021.
Other data released during the week suggested that the economy might be able to skirt a recession as inflation cooled, resulting in a “soft landing.” On Friday, markets appeared to get a boost from the University of Michigan’s gauge of current consumer sentiment, which rose well above expectations to 72.6, its highest level in nearly two years and marked its largest monthly advance since 2006. Consumers surveyed reported better labour market conditions and falling inflation as reasons for improved optimism. Weekly jobless claims, reported Thursday, fell back more than expected, to 237,000, reversing almost all of the previous week’s jump.
10-year U.S. Treasury note yield falls back below 4%.
U.S. Treasury prices jumped as longer-term yields retreated on the positive inflation data, with the yield on the benchmark 10-year note falling below 4%.
Japanese equities lagged behind their Asian peers over the week, missing out on a regional rally driven by favourable developments in the China technology space and hopes of further Chinese stimulus. The Nikkei 225 Index generated a flat return, and the broader TOPIX Index fell 0.7%.
Growing expectations that the Bank of Japan (BoJ) could adjust its yield curve control framework as early as its July 27–28 meeting (having last tweaked it in December 2022) exerted upward pressure on domestic yields. The yield on the 10-year Japanese government bond (JGB) rose to 0.47%, from a prior 0.44%, nearing the 0.50% level at which the BoJ caps JGB yields.
Chinese equities rallied after Beijing telegraphed measures to support the country’s flagging economy. The Shanghai Stock Exchange Index rose 1.29% while the blue-chip CSI 300 added 1.92%. In Hong Kong, the benchmark Hang Seng Index gained 5.71%.
On the economic front, China’s CPI remained unchanged in June from a year earlier and marked the weakest reading since February 2021. Core inflation, which excludes volatile food and energy prices, slid to 0.4% from the previous month’s 0.6%. The PPI slipped to a lower-than-expected rate of 5.4%, its ninth consecutive monthly decline. The data pointed to increasing deflation risks in China’s economy and more evidence that the country’s post-lockdown recovery is weakening.
The Week Ahead:
Next week second-quarter earnings season picks up. Around 60 S&P 500 firms are scheduled to report. Economic releases will include retail sales data and the latest on the U.S. housing market.
The earnings reports ramp up on Tuesday, with Morgan Stanley, Bank of America, Lockheed Martin, and Prologis to be the day's highlights. On Wednesday, Tesla, Goldman Sachs Group, IBM, Netflix, and United Airlines Holdings will report.
Thursday will bring results from Taiwan Semiconductor Manufacturing, Johnson & Johnson, Newmont, and American Airlines Group, and then American Express will close the week on Friday.
On Tuesday, the U.S. Census Bureau will report retail sales data for June. It is forecast to show a 0.4% monthly increase in consumer spending, a tenth of a point faster than in May.
Also on Tuesday, the National Association of Home Builders will release its housing market index for July. The Census Bureau reports June housing starts on Wednesday then the National Association of Realtors adds existing-home sales for June on Thursday.
In the UK the big figures this week are all about inflation……again. On Wednesday we will see CPI, RPI and PPI. All the various acronyms mean slightly different things but the main thing this week is Consumer Price Index as well as Core CPI.
PPI is what producers pay for things and that has been rapidly decreasing for a while now. Unfortunately increasing wages has meant that the price consumers are prepared to pay hasn’t followed suit.
We are desperately hoping that CPI for last month has dropped to 0.3% from 0.7% the month before. If it has, then this may be the beginning of the end. There will still be a long way to go, but in October, last year’s standout reading of 2% will drop off and UK inflation will start to fall.
If this doesn’t happen, then more will need to be done and we are hoping that doesn’t become a reality as the BoE has already started to squeeze the economy more than is sensible.
TPP made good profits last week but many of the traders still hold the FTSE for a bigger, longer-term gain. A strong pound has limited gains recently but we don’t see this continuing now as expected future interest rate levels really can’t now get any higher.
The FTSE is one of very few indices that hasn’t gained at all this year and we do see this as an opportunity. Banks should perform well in the up-and-coming earnings releases and we believe that many energy companies will also post huge profits.
The UK can’t stay out of favour forever! One day soon, we’ll see the start of a rally that we feel could continue for a while. The only problem? Nobody knows when it will begin.
“TPP might just be about to revolutionise investment for the retail market.”
- London Stock Exchange 2020