Astute Market Overview - 18th July 2023
Hello, and welcome to the Astute Market Overview of the week just gone.
UK wage growth (excluding bonuses) came in ahead of expectations last week at 7.3% in March to May 2023. Given the current high level of inflation (with the latest reading 8.7%) this 7.3% increase is a pay cut in real terms. When looking at the data with an inflation hat on (which we’ve had to wear so often recently) the data is higher than expected, which will add to the inflationary pressure, however the evidence of a cut to pay in real terms eases the chance of a wage-price inflation spiral. UK job vacancies for April to June 2023 were released last week from the ONS. Whilst the figure remains at high levels relative to history, vacancies climbed down gradually from mid-2022 highs, at 1,034,000.
In other UK data release news – a UK GDP release revealed that the UK economy shrank by 0.1% in May. This slight economic contraction was a surprise, given just how slight it was! Given the recent spate of interest rate increases, a larger fall was expected. In May, we had the King’s Coronation Bank Holiday and strike action across many sectors, which alone would like cause a drag on GDP. Due to this, it certainly isn’t clear for the Bank of England to see how the economy is faring.
Over in the US: it was a strong week for many key US markets, as they rallied following the release of CPI inflation data. The reading came in at 3% last week, the closest reading to the Federal Reserve’s 2% target since May 2021.
Inflation has come down from its highs in the US, but there is still a little way to go. It seems that the Federal reserve now have two paths they could take to tackle inflation:
1. They could they leave rates at the current relatively high level of 5.25% at the upper bound, to bring inflation down gradually; let the high rates reverberate through the economy. To slip in an analogy here, imagine stepping into the shower or bath after an icy cold walk, or dip in a lake, allowing the warm water to slowly thaw your frozen fingers.
2. Or, they could opt to continue cranking up interest rates aggressively to bring down inflation, which would then result in cutting interest rates much sooner than they would have otherwise. The latter runs the risk of the Federal Reserve being branded “the fool in the shower”, an off the shelf metaphor used to describe central banks who rush to increase (or decrease) rates, without allowing time for them to take effect; much like the same cold weather enthusiast coming home, jumping in the shower and (in their numb fingered panic) turning the temperature dial right up, but eventually getting scalded.
Coming up next week, we have China GDP to digest, and UK and eurozone CPI.
See you next time.