Week ending 26th May 2023.

Relief for investors came this week when a bipartisan deal to raise the $31.4tn US debt ceiling – and prevent the US from defaulting on its financial obligations – was agreed and presented to Congress on Monday morning. The details of the deal include historic reductions in spending and consequential reforms that will lift people out of poverty into the workforce, Speaker of the United States House of Representatives, Kevin McCarthy, said, although there will be no new taxes and no new government programs. The bill will be put to a vote as early as Wednesday (31 May) in the House, followed by the Senate later in the week or this weekend and with the aim of getting it passed before 5 June.

Attention again turned to data on US unemployment and the persistent tightening of the labour market. Last week data showed that initial claims for state unemployment benefits came in lower than market forecasts but increased 4,000 to 229,000. With a raft of unemployment data coming soon focus will be placed upon the Fed’s next moves in relation to rate hikes once they have also digested the latest inflation data.

Personal consumption expenditure data illustrated an increase last week of 0.4% in April after rising 0.1% in March. Core PCE data, which excludes food and energy components – and which is the Fed’s preferred method of inflation – has also climbed 0.4% after rising 0.3% in March. These US revisions to Q1 data not only fly in the face of economists’ warnings of a recession this year, but again constitute further evidence for a rate hike increase.

Over in the UK, statistics on retail sales show a story of growth and recovery, rising by 0.5% from a month earlier in April 2023 and a 1.2% decline from March. While overall this exceeded market expectations of a 0.3% growth, non-food stores in particular saw a stark rebound, with sales rising by 1.0% in watches, jewellery and sports equipment.

The largest member of the Eurozone, Germany, was shown to have entered a recession on Thursday. The agreed upon definition of a recession is two consecutive quarters of negative GDP growth. The most recent first-quarter estimates showed the German economy contracting by 0.3%, following a shrinking of 0.5% in the final quarter of 2022. Analysts place the latest contraction down to a heavy mix of high energy prices triggered by the Russia-Ukraine war and notable frailties in Germany’s economic foundations, frailties that their current coalition government have not been successful in fixing. It is also notable that German exports have suffered due to the rest of the world tightening their metaphorical belts and China’s reopening story playing out over a longer period. However, Chancellor Olaf Scholz had some words of encouragement for those harbouring anxieties over whether the economy’s outlook would have a knock-on effect on the rest of the European bloc, as it accounts for almost 30% of their collective economic output. Germany’s outlook is “very good”, he said, and asked people to have faith in that there is a lot of investment in Germany in particular battery and ship factories.

Coming up this week we also have Brazil/India GDP, Chinese PMI, Eurozone CPI, UK unemployment data.

Nicola Tune, Portfolio Specialist