Market Update – 2nd August 2023.

2nd August 2023

There has been plenty of economic data releases already this week for markets to digest. In the Eurozone, despite remaining higher than the European Central Bank’s target of 2%, the headline figure for the region dropped to 5.3% in July from 5.5% in June. In the recent past, elevated prices resulted from high energy prices caused, in the main, by Russia’s invasion of Ukraine. However, lately food, drink and tobacco have been shoring up inflation and, while increasing by less than they have in previous months, still rose by a steady pace of 10.8% in July.

But will this mean an end to the rate hikes we’ve been seeing from the European Central Bank since July 2022? We can’t say that for sure yet. The ECB somewhat softened their stance last week and vowed to be open minded. However, the fact that core inflation (minus volatile elements like food and drink prices) remained unchanged at 5.5% suggests that we may still see another increase in September.

And yet all is not doom and gloom for the BLOC right now. Data revealed on Tuesday that the Eurozone’s unemployment is now at a record low at 6.4%. This is perhaps an indicator to investors that the job market is more robust than perhaps expected, given the otherwise weak economic data that has come out about the region of late. All eyes will now remain focused on whether this number increases in the third quarter of this year due to the tightening monetary policy actions of the ECB.

New economic data also revealed that while inflation was on the decrease, economic activity pushed the BLOC’s GDP higher in the month of July. Growth expanded in Q2 by 0.3%, surpassing economists’ expectations and clearly illustrating that the rapid cycle of rising interest rates has done little to deter consumers and firms from spending. And yet investors would do well to approach this news with reflexivity and caution, with some anomalies in the data from greater growth in Ireland and France that are possibly one-off cases.

China’s manufacturing data was softer than expected overall. The official NBS Manufacturing PMI rose to 49.3 in July of 2023 from 49 in June, exceeding market forecasts of 49.2. While this indicates contraction, as the number is below 50, it is contracting by less, indicating that the world’s largest economy may be starting to pick up pace. Data also showed improvements on a month-on-month basis in new orders and raw materials inventory sub-indexes. Non-Manufacturing PMI data figure came in at 51.5 in July 2023 from 53.2 a month earlier. Although this shows a decline in the actual figure, we must remember it is still in expansion territory and, with more stimulus measures being pledged by the Chinese government again this week to boost economic growth, will surely only improve in the coming months.

News also came in this week that Fitch’s, the ratings agency, changed the US’ credit rating from AAA to AA+. In their statement on Wednesday, they suggested this was because of growing debt and the erosion of governance relative to other creditworthy peers in the past few years. Realistically, this is something we have seen happen before, in the times of the financial crisis for example, and is not the sensationalist news it first appears. Asian markets declined following the news with China and Japan, holding substantial stakes in American government debt, collectively owning $2 trillion. Impact on market sentiment may not be notably negative, presenting an advantageous opportunity for investors.

Still to come this week the Monetary Policy Committee at the Bank of England will announce the latest interest rate decision. Markets are expecting a 25 basis point move. We also have more PMI data from the US as well as the unemployment rate.

Nicola Tune, Portfolio Specialist