Week ending 30th June 2023.

As you can see from the accompanying table, markets ended the week higher despite somewhat hawkish comments from central bankers. ECB President Christine Lagarde, along with US Fed Chair Jay Powell and Bank of England Governor Andrew Bailey, warned about the persistence of inflation. They made it clear during the annual policy conference in Sintra, Portugal, that interest rates would be raised and kept at higher levels for as long as necessary.

During his speech at the European Banking Forum, Fed Chair Jay Powell expressed his belief that inflation would not reach the central bank’s target of 2% this year or next. He also indicated that policymakers are likely to continue raising interest rates, potentially including a rate hike at the end of July, before taking a break in August. Thus far, the US economy has demonstrated commendable resilience; as such, it may have the ability to absorb a 25-basis point rate hike at the next Federal Open Market Committee meeting. The Stocks gained on Friday, as the Fed’s preferred measures of US inflation cooled in May, and consumer spending stagnated, suggesting the economy’s main engine may be starting to lose some momentum. The personal consumption expenditure price index increased 3.8% year-on-year in May 2023, the smallest rise since April 2021, compared to a downwardly revised 4.3% advance in April. The Fed has always maintained their data dependent stance and need to be careful as to not overshoot rate hikes going forward as inflation continues to show signs of cooling.

The annual rate of inflation across the Eurozone fell to 5.5% in June, down from 6.1% in May. Energy prices witnessed significant declines from the previous year; however, core inflation, excluding volatile food and fuel prices, slightly increased from 5.3% to 5.4% month-on-month, providing a clearer view of longer-term price pressures. In terms of employment in the region, the number of unemployed individuals continued to decline, maintaining a record low unemployment rate, signalling a tight labour market.

Although there has been a significant decrease from the peak of 10.6% in October, persistently high prices in Europe means it is too early for the ECB to declare victory just yet.

The divergence in inflation rates between the UK and the Eurozone this week was attributed to factors such as Brexit and the UK government’s energy price guarantee. The UK experienced higher inflation due to the energy price crisis and labour shortages resulting from Brexit, while the Eurozone benefited from not having similar price caps on gas and electricity, reflecting recent declines in global wholesale prices.

This upcoming week will be a short one due to US markets closing on Tuesday due to the Independence Day holiday. Data wise, this week, we are expecting US Job Openings and Labor Turnover Survey (JOLTS). We will also be looking at UK, US and Chinese PMI data, as well as the US balance of trade and Eurozone retail sales.

Lastly, the Fed will disclose the minutes from its most recent policy meeting, providing significant insights into their discussions.

Kate Mimnagh, Portfolio Economist

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