- Weekly market update
- 5 minute read
A good week for
- The US dollar gained almost +2% on a trade weighted basis
- US equities rebounded over +2% in sterling terms, boosted by US dollar strength
A bad week for
- Bonds reversed the previous week’s rally, with gilts falling c. -2%
- Oil fell over -4% in dollar terms, undermined by dollar strength
A spate of parliamentary resignations toppled UK Prime Minister Boris Johnson. Johnson’s leadership had already been challenged this year after the “party-gate” scandal, but he survived a no-confidence vote. However, fresh allegations of mistruth precipitated widespread resignations, including members of Johnson’s own cabinet, along with calls for Johnson to go. Johnson intends to stay on in a care-taker capacity until September, by which time the contest for the leadership of the Conservative party, and thus the government, will be complete. The field is wide so the backbench 1922 committee is expected to eliminate any candidate that receives fewer than 30 votes in the first round. With the exception of former Chancellor Rishi Sunak, there is broad support amongst candidates for tax cuts. Depending on the design and how they are funded, tax cuts could be supportive for GDP growth in the coming year, which could cause the Bank of England to upgrade growth forecasts and pursue more monetary tightening than their current models would call for.
The Office for Budget Responsibility’s Fiscal Risk and Sustainability Report outlined the challenges facing the UK public finances. These included geopolitical tensions, higher energy prices and demographics. Combined, the report found that these forces could place public debt on an unsustainable path, suggesting it might surpass 250% of GDP over the long term. Future chancellors will have to balance supporting growth now and promoting long term fiscal sustainability.
US employment data held firm in June, but did show some signs of slowing down. The number of payroll employees in the non-farm economy increased by 372,000, a smaller rise than in May but stronger than analysts had expected. However, household survey-based employment indicators, which tend to lead payroll numbers, showed more softness, recording a 315,000 fall in employment. Wage growth also slowed slightly, falling to 5.1% year-on-year. This is above the long term trend level, but well below the prevailing rate of inflation. The Federal Reserve will likely look for a further slowing in the labour market before easing up on the pace of monetary tightening.
Beijing officials are reportedly setting in place significant fiscal support to boost the economy. Growth has been held back this year by the reintroduction of stringent social restrictions in response to a surge in cases of the omicron variant of Covid19. Coupled with weakness in the real estate sector, this has made it unlikely that the government will meet its 5.5% annual growth target. Now, policy makers are expected to boost funding for infrastructure projects via local government special bond issuance and an infrastructure fund. Policy makers also eased social restrictions on intercity travel, cutting the travel history-tracing window to seven days. If China adopts a more flexible approach to managing Covid-19 in 2023, fiscal support could be effective at boosting economic growth.
US tariffs on Chinese goods could be removed in a bid to ease cost increases. The tariffs on more than $300bn of goods were introduced during the Trump presidency in response to China’s alleged theft of U.S. intellectual property. The policy was also seen as an attempt to boost the US manufacturing sector. Removing tariffs would reduce the cost of some goods, but would have only a short and limited impact on inflation, currently above 8%. While lifting tariffs could improve relations with China, limited progress has been made on the issues that initially sparked the trade dispute, and doing so would be unpopular with some manufacturing unions. Nonetheless, Biden must review the tariffs, which will begin to expire in July.
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