- Weekly update
- 5 minute read
A good week for
- Equities rallied in sterling terms, led higher by the US (+2.2%).
- Japan and emerging markets also rallied, rising +1.1% and +0.7% respectively in sterling terms.
A bad week for
- Bonds weakened across the board, led lower by UK gilts.
- Gold declined -2.9% in US dollar terms.
US fiscal policy
The race for US politicians to agree to extend US borrowing enters its final stages. The US government faces defaulting on its debt if Republicans and Democrats are unable to agree to raise the legal limit on borrowing. Treasury Secretary Janet Yellen has said that 1st of June is a “hard deadline” for extending borrowing. Negotiations are underway, but Republican proposals require spending cuts that would hit key features of the Inflation Reduction Act. Should Republicans and Democrats fail to reach an agreement by June, the Treasury could buy time by implementing a partial shutdown of some government services, in order to continue to make interest payments on US debt. Other possibilities are the minting of a special coin, or opting to ignore the ceiling, citing the 14th Amendment, which states that “validity of the public debt, authorized by law... shall not be questioned”. While brinkmanship is likely to cause market volatility, we expect a resolution, though a cut to fiscal spending is likely.
April’s UK labour print showed some signs of labour market easing, which will reassure the Bank of England’s Monetary Policy Committee. A strong rise in activity saw the unemployment rate rise to 3.9%, at the same time as employment increased by 182,000. This was mostly driven by a fall in the share of students who do not work and early retirement. Long term sickness remains a key driver behind higher inactivity, while the share of inactive people that say they do not want a job fell further. Vacancies continue to decline gradually, though they remain above pre-pandemic levels, and redundancies are creeping up. In contrast, private sector wages accelerated, rising to 7% from 6.3% year-on-year. Wage growth is likely to decelerate as inflation cools, with a large fall expected in April’s inflation data, as the April 2022 54% Ofgem price cap rise falls out of the annual calculation.
April data revealed weaker than expected activity, with stronger recovery of retail than industry. Retail sales increased by 18.4% year-on-year in nominal terms, up from 10.6% in March, with eating out the main area of strength. In contrast, industrial production increased to 5.6% from 3.9%, but slowed to 1.3% from 4.4% on a two-year average basis, which accounts for base effects. Manufacturing remains the weakest area of industry. Fixed investment was also soft, slowing to 3.9% from 4.8%. China’s recovery has surpassed expectations in some respects, with a rapid surge in consumption spending, but high youth unemployment may crimp spending in time. On the manufacturing side, weaker export demand, driven by soft growth elsewhere in the world, may continue to weigh on industry, manufacturing and exports.
Japan enjoyed stronger than expected growth in the first quarter, after a stagnant end to 2022. Growth was 0.4% in Q1 of 2023 on a quarter-on-quarter basis, ahead of economists’ expectations. The better-than-expected result was down to stronger consumption spending, which accelerated to 0.6% from 0.2% in Q4. Non-residential investment was also strong, rebounding by 0.9% after a 0.7% decline in Q4. Trade was a weak spot, with a 2.3% decline in imports outpaced by a 4.2% fall in exports. Japan is currently enjoying a strong period of growth relative to other regions, though growth is expected to slow, as weaker external demand is expected to drag on the manufacturing sector.
Revised Eurozone GDP data confirmed that GDP grew by 0.1% quarter-on-quarter, and 0.3% quarter-on-quarter annualised in the first quarter of 2023. Ireland experienced volatile growth, given the elevated number of international companies registered in Ireland. Excluding Ireland, GDP growth was stronger at 0.8% quarter-on-quarter annualised. Of the main Eurozone countries, Germany continues to lag its peers, seeing annualised growth of 0.2% in comparison to Italy and Spain’s 2%. Lower energy prices mean 2023 forecasts have been revised sharply higher, with growth expected to recover later this year. However, even though growth is currently soft, the Eurozone labour market is proving more resilient than expected. Employment grew by 0.6% in Q1, after a 0.3% rise in Q4. The unemployment rate also declined to 6.5%, a historic low.
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