- Weekly update
- 5 minute read
A good week for
- European equities continued to rally in sterling terms, leading equities higher for a third week
- Oil continued to rise, gaining 1.4% in US dollar terms
A bad week for
- Bonds continued to decline, led lower by UK gilts
- The us dollar weakened -0.5% on a trade weighted basis
The oil price has strengthened in recent weeks, boosted by an output cut from members of the Organisation of Petroleum Exporting Countries (OPEC). Several member countries announced voluntary output reductions, equalling 1.16bn barrels a day. This follows Russia’s decision to cut output by 500,000 barrels a day. OPEC’s move was criticised by the US administration, exacerbating tensions between the US and OPEC leader Saudi Arabia. Oil is currently trading around $85 per barrel, compared to $130 per barrel last spring, when the Russian invasion sparked a surge in oil prices. In recent months, energy prices have had a cooling effect on inflation, with prices generally declining over the second half of 2022. However, with economic activity expected to accelerate this year in China, oil demand could rise. Combined with production cuts, this will likely reduce supply and induce higher prices.
UK GDP growth missed forecasts in February, coming in at 0% month-on-month. Some of the weakness was due to widespread strikes by the civil service, teachers and train workers. This resulted in a 0.5% decline in transport output, a 1% fall in the administration sector and almost a 2% decline in education. On the plus side, unseasonably mild and dry weather likely boosted output in the construction sector, entertainment and hospitality. Fewer strikes in March will probably allow a catch up in activity, though more strikes look possible later in the year. Overall, GDP growth is still expected to be weak in 2023, though forecasts have been revised higher. Economists still expect a modest recession of -0.2%, though we see scope for a recession to be avoided.
US monetary policy has been in focus, in the wake of the US banking scare. Minutes from the March Federal Reserve Open Market Committee (FOMC) meeting revealed that participants scaled back their recommendations for monetary tightening, with rates increasing by 0.25%. Several participants contemplated leaving the policy rate unchanged, and other members, who would otherwise have endorsed a 0.5% rise, advocated for 0.25%. The watchword was uncertainty, with expectations of a credit crunch, as US banks tighten credit conditions, but great uncertainty as to the extent. This anticipated hit to credit growth likely offsets the fact that economic data has generally shown greater strength than had been expected, which was pushing up GDP forecasts and expectations of how far central bankers might raise interest rates in response. However, once again, futures pricing is now indicating significantly more monetary accommodation than the FOMC’s own dot plot suggests is likely.
One development that has eased pressure on the Fed is the sharp decline in US inflation this year. March Consumer Price Inflation (CPI) slowed to 5% year-on-year, down from 6% in February. This largely reflects the large 1% month-on-month rise in inflation last year rolling out of the calculation, with June likely to deliver another large step down. Much of this reflects sharp increases in energy prices in 2022 reversing in 2023, with energy prices detracting c. -0.25% points in March 2023. Within the core basket, which excludes volatile energy and food prices, CPI was more resilient, strengthening somewhat to 5.6% year-on-year. However, much of this reflects changes late last year and on a month-on-month basis inflation slowed from 0.5% to 0.4%. This was primarily driven by lower rent and shelter costs, as expected given the weakening of the housing market.
Where will inflation go from here? A recession would cool inflationary pressures, and the sharp fall in the March ISM index points to weaker activity. Both services and manufacturing indicators eased in March, with the manufacturing index slipping into contractionary territory. The National Federation of Independent Business Survey also pointed to tighter credit conditions. On the consumer side, while retail sales shrank 1% in March, the labour market remains resilient, though wage growth is beginning to slow and there are signs of easing.
The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.