Market Update – 24th May 2023.

24th May 2023

PMI data released on Tuesday came in strong for both the US and the UK. In the US, the figure beat forecasts of 53.4 and instead reported an increase to 54.5, which points to a continued expansion of the US economy.

Amongst the reasons for growth is a renewed momentum in year-on-year private sector business activity which has now reached its highest reported level in 13 months. Whilst the resilience of the US economy spread optimism amongst investors on Tuesday, comments made by Fed Officials Tom Barkin and James Bullard brought investors back down to earth by reiterating the potential need for additional interest rate hikes further into the year.

On this side of the pond, the UK is portraying the two-headed Roman god Janus, with the divergence between their manufacturing and services PMI data making things very difficult for policymakers indeed. CPI figures came in this morning at 8.7% surpassing forecasts of 8.2%. Whilst inflation remains persistent, this is a notable decrease after UK CPI has remained in double figures for a considerable amount of time. The UK economy overall exhibited a further month of growth in May, albeit slower this time, with Composite PMI coming in at 53.9, down from 54.9 in April – the manufacturing sector contracted while the services sector expanded. Of course, as it is the service sector that ultimately shapes policy, the Bank of England will be looking to this sector to gauge inflationary pressure within the economy, and we may find that interest rate rises are not yet done.

In other good news for the UK, the International Monetary Fund reported this week that the UK’s GDP now looks set to grow by 0.4% this year, rather than contracting by 0.3% as predicted in April. The IMF no longer expects a recession in Britain this year with the improved outlook brought on by a resilience of demand, increased government spending and improved business confidence amongst other things.

The US debt ceiling is still making headlines this week. After a short pause in negotiations, President Biden and current speaker of the US House of Representatives, Kevin McCarthy, resumed their meetings on Monday, with McCarthy calling their discussion productive and ‘better’ than any of the others. It still remains to be seen just when Congress will reach an agreement before the deadline date in June, but both parties are said to have left room for concessions on certain issues. As for the ceiling’s effect on markets, Mohamed El-Erian, an economist with Cambridge University, claims that the market has dealt with the uncertainty ‘impressively well’, maintaining that it has been able to generate stable revenues almost regardless of what’s happening in the broader economy.

This week Biden has also spoken out about tensions with China. During the G7 meeting in Japan in May, the president stated that he expected the previous cool feelings that have characterised their relationship start to ‘thaw’, with a promise that we would start to see evidence of that very soon.

Still to come this week we have Japanese inflation, German GDP, UK retail sales.

Nicola Tune, Portfolio Specialist