Markets’ focus has been firmly fixed on key economic data releases this week.
In the US, the much-anticipated CPI showed that inflation fell to its weakest annual pace of growth in two years. The annual inflation rate fell to 4.9% in April 2023, below market forecasts of 5%. In addition and as expected, the annual core consumer price inflation rate (which excludes food and energy) ticked down to 5.5% in April 2023 from 5.6% in the prior month, amid a downtick in the costs of rent. Although the uptick shows that prices are still sticky after a year of aggressive tightening, (the Federal Reserve has hiked its policy rate by 500 basis points since March 2022) investors were reassured that inflation readings were within estimates.
The Fed raised interest rates by another 25 basis points to 5.00%-5.25% last week. Inflation is still running too hot for policymakers to consider cutting interest rates, however, with signs of easing price pressures in April, Fed officials may look to pause their aggressive tightening cycle next month if data supports.
Markets are growing increasingly concerned as the US debt ceiling deadline looms. President Joe Biden and top lawmakers continue talks this week aimed at reaching an agreement over raising the $31.4 trillion debt limit. Biden emphasised that the Republicans must remove the risk of default and even hinted that he wouldn’t rule out using the unproven 14th amendment to the U.S. Constitution to challenge the constitutionality of the debt ceiling. Biden referred to the discussions as “productive” and appeared to offer Republicans some potential compromises, including taking a “hard look” at recovering unused coronavirus relief to cut federal expenditure. Whilst Republicans and Democrats frequently hold different viewpoints, it can be agreed that neither party wants to take the fall for a potential default and there is still confidence that both parties reach an agreement to lift the limit in the nick of time.
Looking to China, exports rose by 8.5% on year in April whilst imports unexpectedly fell by 7.9% amid weakening domestic demand and lower commodity prices. In addition, data released today reinforced signals that domestic demand remains fairly weak as China’s annual rate of inflation fell to 0.1% in April 2023, missing estimates of 0.4%. We saw China’s economy expand more quickly than anticipated in the first quarter, although factory output has lagged amid lacklustre global growth. With the country keen to revive growth, Beijing has pledged to bolster trade to support the economy and data suggests that further stimulus measures may be needed to support the post-COVID economic recovery.
Markets await the Bank of England’s interest rate decision later today; policymakers are expected to raise interest rates by another 25 basis points as high inflation persists.
We also have US PPI, UK GDP and the University of Michigan Consumer Sentiment.
The Investment Management Team