Market Update – 26th July 2023.

26th July 2023

PMI services and manufacturing data came in this week for the UK, Eurozone and US.

With regards to the UK, manufacturing PMI reflected a decrease in production from a downturn in orders both domestic and foreign. It declined for a further time in 12 consecutive months, falling to 45 in July from 46.5 in June. The figure was also below market expectations of 46.1. Services PMI, although still in growth territory, i.e. above 50, dropped to 51.5 in July down from 53.7 in June. The data further emphasises that the UK is moving at a slower pace in the second half of 2023 with higher interest rates and purse-squeezing cost of living that is that is taking its toll on individuals and their spending habits. Nevertheless, the full impact of the Bank of England’s interest rate increases is yet to be felt and the data perhaps supports policymakers to opt for a smaller 25 basis point interest rate hike next month.

Earlier on Monday (24 July 2023), the Eurozone PMI data was released, and, unlike the UK, it significantly missed economists’ expectations, revealing a clear decline in economic activity. The contraction in business activity in the Eurozone was driven by a decline in demand within the dominant services industry and the steepest fall in factory output since the start of the COVID-19 pandemic. The latest PMI data is likely to result in increased demands for policymakers to stop increasing rates after the 25 basis point rise expected on Thursday (27 July).

In the US, PMI data came in with more gusto. Whilst services PMI fell to 52.4 from 54.4 in June, manufacturing PMI improved to 49 from 46.3. This marks the US economy’s 6th month of growth in succession. This year we’re seeing the US battle with hurdles to economic expansion like sticky inflation as well as a resilience in things like consumer spending that is making the Fed’s job of getting inflation to their 2% target difficult indeed. And yet this data will likely be viewed positively by the Fed when they make their next decision on rate hikes – a welcome balm to investor sentiment. This slowdown in activity may be just enough to encourage them to raise interest rates by a quarter of a percentage point, and make it potentially the last increase of their current cycle.

In China, political leaders seemed to have had enough waiting when it comes to economic growth, it was revealed this week. After easing interest rates last month to support businesses and homeowners, members of the Communist party gathered at the Politburo and pledged a new wave of stimulus measures to the country in the coming months. The committee said they would be focusing on bolstering the consumption increasing international travel, as well as stabilising foreign trade. Investors will have to wait and see just what the measures will include on a practical level as China’s leaders remain tight lipped for now, but the news will no doubt be welcome news to markets who have been waiting for the country’s momentum to pick up speed.

Big tech earnings also made news this week, with Alphabet and Microsoft shares impressing investors by reporting better-than-expected revenue and profits.

Still to come this week we have US GDP Q2, durable goods orders and PCE (the Fed’s preferred measure of inflation). We also have Eurozone economic sentiment, as well as policy decisions from the Fed today and the European Central Bank tomorrow (27 July). The Bank of Japan will also announce its rate decision tomorrow.

Nicola Tune, Portfolio Specialist