Market Update – 16th August 2023.

16th August 2023

Giving the Bank of England something to think about this week, data came in on Tuesday (15 August 2023) revealing that the UK’s labour market is finally showing some signs of softening. Reports highlighted a fall of 66,000 job vacancies in the three months leading up to June, whilst the unemployment rate rose by 0.3% to 4.2%. However, wage growth continues to be a concern for policymakers, wages excluding bonuses recorded a year-on-year growth of 7.8% in the three months leading up to June, the highest since records started in 2001.

There is evidence that policymakers’ consistent rate hikes are starting to have an effect in the wider economy. No doubt, higher interest rates are beginning to dampen consumer spending (even if relatively so) as well as decrease investments by businesses, causing employers to cut back on hiring and ultimately increasing unemployment rates.

Data this morning (16 August) revealed that the UK consumer price inflation for July 2023 declined sharply to 6.8% from June’s 7.9%, marking the lowest point since February 2022 and aligning with market expectations. The Office for National Statistics noted that falling gas and electricity prices made the most significant downward contributions. Additionally, the core inflation rate, which excludes volatile components like energy and food, remains stubbornly high with the rate unchanged at 6.9%, the same as June’s figure. Although this rate remains above the Bank of England’s (BoE) 2.0% target, it gives the central bank flexibility to continue with its ongoing policy tightening strategy.

The BoE does not meet again now until late September, and so economists have a long month ahead to speculate about how this new data will be taken by the BoE in their battle to reduce in inflation to their 2% target.

Over in China, some less than impressive economic data was offset by the introduction of a strong measure of monetary stimulus set to expand economic growth. While unemployment came in higher than expected and retail sales below market expectations, the government ramped up their support for propelling the region’s momentum by cutting some key policy rates. In an unexpected – and welcome move – China’s central bank trimmed the rate on one-year medium-term lending facility loans to offset factors such as tax payments and to shore up consumer confidence in the longer term. Economists are still yet hoping for more. Next week, we may well see the People’s Bank of China further cut Prime loan rates in what may be just the beginning of the China’s rebound from the lows of Covid-19.

Still to come this week we have US Industrial production, UK retail sales, Eurozone GDP and Fed minutes.

Nicola Tune, Portfolio Specialist