Market Update – 16th June 2023.

16th June 2023

It’s not just the weather that is heating up this week, as markets got off to a strong start fuelled with optimism that the Federal Reserve will announce its first pause in monetary policy.

The release of the latest US inflation report coincided with the commencement of the Federal Open Market Committee’s two-day policy meeting on Tuesday 13 June.

The consumer price index, an indicator that tracks variations in the prices of a wide range of goods and services, rose by 0.1% for the month of May. The annual rate of inflation rose at 4% in May down from 4.9% in April 2023, the lowest in 2 years.

Consumer prices in the US experienced minimal growth, however, despite this there were indications of persistent underlying price pressures, reinforcing the belief that the Federal Reserve would maintain its current interest rates while adopting a more cautious stance. The CPI report showed a smaller increase could be attributed to declines in energy-related costs such as fuel and electricity.

The steady decrease in inflation and a slowdown in the labour market provides the Fed with an opportunity to abstain from raising interest rates later on today (Wednesday 14 June). This would mark the first time since March 2022 when the Central Bank initiated its most rapid tightening of monetary policy in over four decades. Despite having increased its policy rate by 500 basis points during this tightening cycle, the Fed is anticipated to keep the possibility of future rate hikes open.

Turning to the UK, latest employment data showed the labour market is looking very tight. The UK’s unemployment rate dropped to 3.8% from 3.9% in the three months through to April 2023, lower than the anticipated 4.0%. Bank of England Governor Andrew Bailey told lawmakers on the House of Lords Economics Affairs committee: “We’ve had a fall in the supply of labour, which is showing signs of recovering, but very slowly”.

Annual growth in wages excluding bonuses rose to 7.2% during the three months to April, the highest level outside of the pandemic when wage data was distorted due to furlough schemes. UK companies are finding it difficult to recruit, pushing wages higher and bringing the unemployment rate down. The latest data strengthens the case for the Bank of England’s Monetary Policy Committee to continue to raise interest rates. Last month policymakers increased the bank rate by 0.25% to 4.5%, representing the twelfth straight rate hike. Markets are expecting another 25-basis point move next week on 22 June 2023.

Still to come this week we have US PPI and retail sales, Chinese retail sales, industrial production, and unemployment rate. We also have Interest rate decisions from the European central Bank and Bank of Japan.

Kate Mimnagh, Portfolio Economist