Market Commentary 27th February 2023 – from William Binks

A closely watched composite purchasing managers’ index (PMI) pointed to growth in activity at a faster than anticipated pace. This is the first time the data pointed to growth in activity since July 2022. Both manufacturing and services saw a return to growth.

Economic data in the UK measuring consumer confidence painted a picture of a slowly improving position. Consumer confidence increased to its highest reading since April 2022 and the monthly increase in February was the biggest in almost two years. Consumer views towards the UK’s economic position for the upcoming year improved last month.

The Consumer Price Index (CPI) within the Euro Area slowed to 8.6% year on year in January 2023, still considerably higher than the European Central Bank (ECB) target of 2%. The core inflation rate, which excludes things such as energy and food, rose to 5.3%, the highest rate recorded so far.

A preliminary release for a Services PMI within the Eurozone pointed towards the sectors strongest level of growth since June 2022, with financial services and tourism having the greatest contribution. Activity in the manufacturing sector did not look so rosy, with its eighth consecutive monthly contraction.

Investors appear to be digesting the previous week’s inflation figures with expectations for continued interest rate rises in the US. Minutes released from the last meeting between the Federal Reserve indicate that almost all participants agreed a 0.25% increase would be appropriate, whilst some members argued for a 0.50% hike.

An initial estimate for Composite PMI within the US in February pointed towards growth in the manufacturing and service sectors for the first time in eight months. Input cost inflation has continued to slow, whilst output charges rose in services even faster as firms are eager to pass on their increased costs to consumers. Business confidence in the US is the highest since May 2022.

The annual inflation rate in Japan rose to 4.3% last month, the highest reading since December 1981 amidst increased costs of imports and a weaker yen. The Bank of Japan (BoJ) continue to maintain their ultra-loose monetary policy and the central bank’s next expected governor, Kazuo Ueda, signalled that they were in no rush to change this.

Tensions between China and the US are rising as the Chinese authorities urge state-owned firms to stop using the big four US accounting firms to curb western influence. This comes following numerous Chinese surveillance vehicles being found in US airspace.

Gilt yields in the UK continued to rise last week as investors expect the Bank of England to implement a further rate hike to help ease inflation.

Record high core inflation rates have led to investors pricing in further rate hikes. The European Central Bank (ECB) President, Christine Lagarde, said that there is every reason to believe that they will implement another 0.50% rate hike in March.

The US Treasury yield is sitting at a three month high following expectations that the Federal Reserve will continue with their hawkish rhetoric to help tame high inflation.

GBP / EUR – Current 1.1320 Previous 1.1258

The Pound fell 0.79% across the week against the Dollar as the Federal reserve are expected to continue to stick to its hawkish monetary policy. Against the Euro, the Pound increased by 0.55% last week as the Eurozone continues to battle with rising inflation.

Expectations for China’s economy to recover and spur demand for fuel and oil alongside Russian’s plan to cut oil exports led to an increased price for oil last week.