Market Update – 7th June 2023.

7th June 2023

Markets got off to a slower start this week after ending on a high last week following US lawmakers reaching a deal to raise the federal debt ceiling.

Oil prices rose on Monday after Saudi Arabia announced over the weekend it would cut supply by 1 million barrels a day in July. The news comes after the Organization of the Petroleum Exporting Countries (OPEC+) also agreed to continue its production cut to shore up falling prices. Production targets are set to drop by a further 1.4 million barrels per day from 2024. The move highlights the ambiguous outlook for the demand for oil in the coming months.

In the US, ISM Services PMI fell to 50.3 in May from 51.9 in April, demonstrating the fifth consecutive month of expansion in the services sector. A reading above 50 implies expansion, while one below indicates contraction. Data came below forecasts of 52.2, amid a slowdown in business activity and new orders. The majority of those surveyed said that business conditions are sound right now, however there are worries about the economy’s slowdown. Whilst this data isn’t great news for the US economy, it does bolster the case for policymakers to pause rates at their next meeting, with signs that inflation is responding to monetary tightening.

The potential impact of slowing global economic growth on energy demand overshadowed Saudi Arabia’s vow to further limit supply and helped erase crude oil gains this week.

The Reserve Bank of Australia surprised investors on Tuesday (6 June) after it unexpectedly increased interest rates by 25-basis points to 4.1% this week following a 25-basis point increase in May, leaving the door open for additional tightening as inflation remained persistently high and wage growth stepped up.

The latest UK Services PMI was revised slightly higher to 55.2 in May. Survey data showed that input costs had continued to rise mainly due to higher wages, however consumer demand held steady over the course of the month, with robust increases in output and new work being attributed to cautious optimism about short-term growth prospects.

UK retail sales rose by 3.7% year-on-year in May, down from a 5.2% growth in April as higher food prices urged shoppers to rein in spending on non-essential items and the three bank holidays failed to boost sales. Due to the Coronation bank holiday and Eurovision, grocery expenditure soared, but spending on fuel decreased for a third straight month. Whilst we are unlikely to see any significant growth in sales in the coming months, signs that inflation has peaked give retailers hope consumer confidence will steadily improve.

The latest PMI survey in China indicated a strong recovery in Chinese services activity in May. Services PMI rose from 56.4 in April 2023 to 57.1 in May. Activity has increased for five months running as the post-COVID recovery continues. In response to reports of higher demand, new export business increased steadily, new orders grew more quickly, and employment increased for a fourth consecutive month, while the rate of job growth slowed. The data comes after the country announced a basket of new measures to boost economic growth last week. With weak balance of trade data for May, there is hope that stimulus packages will target specific sectors of the economy such as manufacturing and property to boost consumption and consumer confidence.

Still to come this week US trade data, US initial jobless claims, Eurozone GDP and Chinese CPI.

Kate Mimnagh, Portfolio Economist