- Weekly market update
- 5 minute read
A good week for
- The US dollar continued to rise, gaining +0.8% on a trade weighted basis
- UK and US equities held their ground in sterling terms
A bad week for
- Equities elsewhere broadly softened in sterling terms, especially in emerging markets (-1.4%)
- Bonds also declined, led lower by UK gilts (-1.0%)
At a time when many developed market central banks are still working to bring down inflation, the People’s Bank of China faces a different challenge – deflation. Chinese consumer prices fell by -0.3% year-on-year in July, though core inflation accelerated to +0.8% from +0.4%. The weakness in headline inflation was primarily due to a -1.7% annual fall in food prices, while core inflation was supported by stronger service price inflation. Nonetheless, the weak inflation backdrop reflects the softening of demand since the heady start of China’s post-pandemic reopening. Weaker labour demand and impaired household balance sheets are likely to inhibit consumption spending. In response to the July inflation print, a spokesman of China's statistics bureau said that there is no deflation in China and there will be no deflation in the future. At a recent Politburo meeting, officials endorsed consumption-orientated stimulus measures, which could boost demand. However, such schemes are likely to be limited to regions where local governments are able to afford to finance policies. Key areas are likely to be household goods, autos and consumer electronics.
US inflation remains in focus, as the US Federal Reserve approaches the end of its rate hiking cycle. Headline US CPI rose modestly in July to 3.2% year-on-year, but core inflation decelerated to 4.7%. Within the core basket, goods prices continued to decline in a year-on-year basis, while services prices are still rising, albeit more slowly. Housing costs, a significant share of the basket, continue to be weaker while the “core services” components showed greater resilience. If the downward trend in CPI is sustained in August, the Fed are likely to leave rates unchanged in September.
In a surprise move, President Biden signed an executive order to limit US investment in Chinese tech firms. The order seeks to prevent “foreign countries of concern” from benefitting from US investment in technologies that the US sees as critical to its national security. These include semiconductors and microelectronics, quantum information technologies and artificial intelligence. The law will undergo an industry consultation process before implementation, to limit the risk of unintended consequences for US investors and firms. Some consider the law to be counterproductive, offering Chinese firms greater protection from US intelligence, rather than protecting US firms.
UK GDP growth was stronger than expected in the first quarter, at +0.2%. This was ahead of analysts’ average expectations of zero and the Bank of England’s forecast of +0.1%. Growth in June was also stronger than expected, at +0.5% versus -0.1% in May, though partly reflects a catch-up in activity after the extra May bank holiday. For the quarter as a whole, government spending rose by 3.1%, and business investment by 3.4%, boosted by strong aircraft sales, more than offsetting weaker investment elsewhere. Falling inflation is expected to put less pressure on household spending in coming quarters, though the bulk of the impact of already-executed rate rises is likely still to be felt by households, given the high share of mortgages on fixed rate agreements.
US banks face fresh scrutiny after ten were downgraded by a ratings agency. Moody’s cut the credit rating of several small and mid-sized banks, warning that six further institutions were under review. The news follows turmoil in March, after the failure of one bank set in motion deposit flight from several others. This created stress within the US banking system but did not result in a credit crunch. Another ratings agency, Fitch, has also warned that it may downgrade the US banking sector, which would likely result in downgrades for individual banks, including larger ones. Large banks have so far been insulated from much of the volatility, in part because they face stricter regulations in the first place.
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