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Astute Market Overview - 14th June 2023


Let’s head to East Asia to start this week’s overview, specifically, Japan, where we’ve recently seen evidence of a resilient economy. Gross domestic product (GDP) for Japan was revised upwards last week, to 0.7% quarter on quarter for the first quarter of 2023. To paint a fuller picture of Japan’s economic situation: Japan’s Purchasing Managers index data for May is into expansionary territory, with services PMI at 55.9 and manufacturing PMI at 50.6.

This comes as two of the largest investment indices in Japan sit at their highest levels in three decades.

As we said in the overview on 23rd May, Japan has struggled with stagnating wages and deflation for many years, and have held their interest rates at low levels. Given that Shuntō negotiations earlier in the year resulted in the biggest pay hike for labour unions in Japan in 30 years, the Bank of Japan’s focus will be on whether there is enough momentum in this current growth spurt to break the previous cycle, and see sustainable wage increases.

Turning to China, last week we had the release of CPI inflation. Headline CPI came in at 0.2%, meaning that prices had increased by 0.2% vs a year earlier. Delving further into inflation data, Producer Price Inflation (PPI) for China was also released last week, which is a gauge of wholesale inflation, coming in at -4.6%, which is both a greater drop than the previous month, and a greater drop than expected. A prolonged period of producer price deflation could hamper company profits in the region, and the anticipation of further falling prices could mean consumers delay purchases of goods or services – compounding the issue.

The Governor of the Peoples Bank of China (PBOC) attributed the low headline CPI figure of 0.2% (which is a far cry from the high levels of inflation we have here in the UK) to the high base effects of energy and vegetable prices last year.

Eurozone GDP growth for Q1 was revised downwards to -0.1%. Whilst a 0.1% fall sounds small, it indicates that the Eurozone has slipped into a technical recession, given that Q4 2022 saw GDP fall 0.1% quarter on quarter. The European Central Bank will certainly be considerate of the recessionary environment when setting interest rates this week, however we know they are committed to tackling inflation.

A key point to note is that yes, the eurozone meets the criteria for a technical recession, however, as we’ve mentioned previously in our updates, a technical recession doesn’t necessarily equal a full blown crisis that we associate with the word “recession”, for example: a severe and prolonged contraction in the economy, high unemployment and social pain.

We are taking a short break from the Astute Market Overview, so there won’t be a release next week. However, we’re always monitoring the markets, and in particular we’ll be looking out for interest rate decisions from the ECB and Fed this week.

See you next time.

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