6th June 2023
“America can breathe a sigh of relief.”
These were the words of Democratic Senate leader Chuck Schumer last week as the debt ceiling bill flew through the House of Representatives, Senate and, finally, US Congress – approving a deal to lift the nation’s borrowing limit and avoid a disastrous default on its $31.4 trillion debt.
Referencing the political wrangling that came before the deal, Treasury Secretary Janet Yellen pointedly commented:
“I continue to strongly believe that the full faith and credit of the United States must never be used as a bargaining chip.”
It will come as no surprise that global stocks were buoyed by the news, but the relief rally was tempered as investors – who are becoming accustomed to US debt dramas – had largely discounted the news. Japan’s Nikkei index ended the week at its highest close in 33 years – since July 1990.
Interest in interest rates
Markets don’t stand still for long, and they quickly shifted their beady eyes to US jobs data and the likely next move on interest rates by the Federal Reserve.
New jobs for May doubled expectations, with a blockbuster 339,000 jobs added – underlining continued strength in the jobs market despite rising prices and borrowing costs. Despite this, the unemployment rate rose to 3.7% and wage growth slowed, suggesting an inflection point in the labour market. Wall Street rallied on the jobs news, with the S&P 500 adding 1.8% on the week.
The news left investors more puzzled over whether the Fed will hike, skip or pause. Indeed, the Fed now enters its ‘blackout’ period ahead of its next rate-setting meeting, with next week’s CPI inflation report the most significant data point ahead of its decision.
Manufacturing continues to slow
On Thursday, the release of business surveys highlighted the impact of sluggish global demand on manufacturing activity in Europe, the US and Asia’s largest exporting nations. The decline in manufacturing was widespread across the eurozone, affecting the four largest economies: Germany, France, Spain and Italy.
Similarly, the US experienced a seventh consecutive month of decline in its manufacturing sector, while China’s factory activity contracted more rapidly than anticipated, reaching a five-month low. The persisting challenge of subdued global demand continues to pose significant difficulties for Asia’s major exporters.
Asia’s recovery loses steam
The weak data was a further indication of Asia’s patchy recovery from the pandemic – particularly in China, where there are growing signs that the rebound is losing impetus. China’s post-pandemic stock rally also appears to be faltering. After surging 20% from October to January, China’s blue-chip index, the CSI 300, has handed back those gains and is down 1% year-to-date.
An improving picture for the eurozone
Closer to home, the eurozone received good news as inflation in the region eased more than anticipated in May. The headline inflation rate dropped from 7% in April to 6.1%, marking the lowest figure since February last year. Despite this improvement, European Central Bank (ECB) President Christine Lagarde expressed that inflation was still considered “too high” and “set to remain so for too long”.
The ECB is scheduled to convene on 15th June to determine its next interest rate decision. Markets have priced in two additional 25 basis point increases – in June and then either July or September – after which the rates are anticipated to stabilise at 3.75%. Notably, substantial declines in energy-related inflation are anticipated to contribute to a significant period of disinflation during the summer, although concerns persist regarding an upward trajectory in wages.
An improving outlook for eurozone inflation and dropping oil and gas prices could precede some further moderation in UK inflation in the coming weeks, although the outlook for UK CPI remains consistently higher than elsewhere. Markets are still discounting interest rate hikes of a further 100 basis points by the Bank of England (BoE) through to the end of the year.
In May, British factories experienced a decline in exports for the sixteenth consecutive month, which they attributed to the growing challenges in trade with Europe caused by Brexit-related barriers. As a result, the manufacturing sector contracted for the tenth consecutive month, primarily driven by the persistent decrease in exports.
One for the history books?
Will Brexit be remembered as a “historic economic error”? Former US Treasury Secretary Larry Summers said that it damaged the UK economy and drove inflation higher. What’s more, research by the London School of Economics estimates that British households have paid £7 billion since Brexit to cover the extra cost of trade barriers on food imports from the EU, pushing up annual food bills by an average of £250.
Mortgage holders dread renewals
While the news of falling house prices may be seen as a good thing for first-time buyers, the recent confirmation by Nationwide that UK house prices have experienced their sharpest decline in 14 years in May emphasises the challenges faced by the housing market. The average house price has decreased by 3.4%, marking the largest year-on-year drop since 2009 during the global financial crisis.
Additionally, more than 2.5 million owner-occupiers are yet to experience an increase in their fixed-rate mortgage deals throughout the remainder of 2023. Considering the Bank of England’s likely continuation of raising borrowing costs, it’s anticipated that house prices will face further downward pressure.