Market Update – 17th May 2023.

18th May 2023

Time is running out for the US to raise its debt ceiling. President Joe Biden is due to attend the G7 summit in Japan on Wednesday; however, his Asia trip will be cut short to meet with congressional leaders in Washington on Friday.

The US government’s failure to pay its debts could lead to financial instability on a worldwide scale. Federal and military workforces’ salaries would no longer be able to be paid by the government. Millions of American retirees depend on Social Security checks which would halt. Both sides are aware of the disastrous consequences of a default and so we expect the debt limit to be raised soon simply because the alternative would be so disastrous.

Democrats and Republicans have been at a stand-off in recent weeks, however following emergency talks at the White House yesterday, President Joe Biden and Republican leaders expressed cautious optimism that an agreement to raise the US debt ceiling is within sight.

Turning to economic data, US retail sales increased by 0.4% in April, falling short of the forecasted 0.8% growth. The recent slowdown and discussions about raising the U.S. debt ceiling have drawn attention to the question of whether the central bank would pause hiking or lower interest rates which would be a welcome tailwind for bond and equity markets.

In the UK, the Office of National Statistics (ONS) revealed the unemployment rate rose to 3.9% in the three months to March, up from 3.8% in the previous quarter. There were further signs of a slowing job market as estimated job vacancies fell by 55,000 to 1.083 million in the quarter from February to April, marking the 10th successive fall.

Provisional data showed businesses reduced their payrolls by 136,000 in April to 29.8 million, which reflects the current uncertainty faced by UK firms. According to the ONS, this marked the first decrease in the number of total payrolled employees since February 2021; an indication that the economy has lost steam as higher interest rates start to weigh on demand which reflects why we have reduced our weighting to the UK. A slowing labour market theoretically makes sterling more attractive to foreign investors and reduces the pressure on the Bank of England to hike interest rates.

Looking to China, retail sales rose by 18.4% from the previous year in April 2023, falling short of market expectations of 21.0%, but rapidly increasing from a 10.6% growth the month before. Sales increased for the majority of industries, marking the third consecutive month of growth in retail commerce and the fastest pace since March 2021. Industrial production for April was up 5.6% year-on-year, compared to the 10.9% expected. The data indicates China’s economy is in the process of recovering from years of zero-Covid restrictions and whilst figures have missed expectations, they are still positive when compared to the previous year, with hopes that policymakers may need to offer further support to bolster economic growth.

Still to come this week we have US housing data, Eurozone and Japanese CPI inflation, and the Empire State manufacturing survey.

Kate Mimnagh, Portfolio Economist