Market Update – 19th July 2023.

19th July 2023

The news at the start of the week spoke of the noise surrounding China’s latest GDP figure. Reports noted that GDP grew 0.8% in Q2, versus 2.2% in Q1. Commentators suggest that this indicates slowing momentum in the second quarter, caused in part by a weakening demand both within China and abroad. Consumers being slow to come out of hiding following post-Covid lockdown measures is also – of course – being rehashed, with many linking less than rambunctious spending to an elongated economic recovery story. And yet, what is perhaps not being spoken about as much, but what arguably deserves to be, is that this growth still points to an expansion greater than that of other major economies and so is quite positive in that respect. The GDP figure for this quarter might not be as much as the previous, but if we look at it year on year, the Chinese economy expanded by 6.3% in the second quarter of 2023, expanding from 4.5% in the first three months of the year and at the quickest annual pace since the second quarter of 2021. Whilst the complete revival of China’s economy might still be a little way off yet, authorities are also set to execute more stimulus packages. Expected in the coming months are things like fiscal spending to aid infrastructure projects, and more support and relief provided for private companies and consumers, putting China in good stead for gaining even more traction in the third quarter of 2023.

In the U.S., data was released this week on consumer spending that placed further doubt on the US entering a recession this year. Retail sales came in less than forecast but showed a rise of 0.2% from that in June, illustrating that the US consumer is showing little sign of easing their spending. Of course, it must be remembered that the Fed has so far doled out 16 months of rate tightening, none of which seems to be deterring the US consumer from putting their hands in their proverbial pockets. Economists state that the fact rate hikes have not meaningfully slowed consumption leaves the Fed with few reasons to think it has gone too far and that they will likely further increase interest rates when they meet again this month.

Finally, we have been maintaining for a while now that UK inflation will soon come down, and swiftly, and figures this morning showed that this is now coming to fruition. The annual rate of inflation fell to 7.9% in June 2023, the lowest level since March 2022 and below forecasts of 8.2%. In particular, the core rate – excluding energy and food – lowered to 6.9% from 7.1% in May – mainly attributable to falling fuel prices. Over the next few months, annual inflation rates will be calculated against high base values so we should continue to see inflation fall quickly. While Chancellor Jeremy Hunt states that the slowdown is proof that the government is on track to half inflation by the end of the year, inflation still remains above the BoE’s 2% target, suggesting a further basis point raise next month. However, where we saw the policy interest rate rise by 50 basis points in June, we may experience a less aggressive one this time in response to this drop in inflation, perhaps 25 basis points. With inflation showing material signs of cooling, the latest data will boost markets and ease pressure on policymakers.

Still to come this week we are expecting the latest inflation data for Eurozone, Fed chair Powell’s testimony, UK retail sales and consumer confidence. Also this week we have Japanese balance of trade and inflation

Nicola Tune, Portfolio Specialist