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Astute Market Overview - 20th September 2023

Welcome to the latest Astute Market Overview, covering the last couple of weeks in markets.

UK Gross Domestic Product (GDP) was released last week for July 2023, showing a decrease of 0.5% from the previous month. This was more of a decline than was forecast, highlighting that we may finally be dipping our toes into recessionary waters, something the UK has avoided so far. However, the word recession can cover a multitude of sins, from the technical definition – two consecutive quarters of negative GDP growth, which may be needed to tame inflation – to a full blown, painful recession, with the addition of high unemployment, and a huge drop in production and consumer spending. Whilst this month on month drop could be the start of a recession, one month of declining GDP is far from two quarters, meaning that it would be into next year before a recession could be confirmed.

Moving to the eurozone, the European Central Bank (ECB) revealed their latest interest rate decision over the period, increasing key interest rates by 0.25%, with no hint of rate cuts in the near future. Christine Lagarde, the president of the ECB, promised that future rates will be guided by the data and that rates will be as restrictive as it takes, for as long as it takes to tame inflation at the 2% target.

Over the last month, the oil price has been drifting upwards – which comes as no surprise to those who watch the prices at the pump, or run their home on oil boilers. The price of a barrel of brent crude oil – widely used as the benchmark for oil prices – has increased, edging up to $95 per barrel from lows of just over $71 in June. This comes as Saudi Arabia and Russia agree to extend their cuts to oil supply – the two major oil producers have previously agreed to reduce the amount of oil they’ll supply, and now they have extended this to the end of the year.

The oil price increase fed into US CPI inflation; the headline year on year measure increased from 3.2% to 3.7% in August 2023. The core CPI measure, however, decreased from 4.7% to 4.3%. This measure removes food and energy, and is the measure that matters most to the Federal Reserve (Fed) in their battle against inflation. Ultimately, this paints a picture that the Fed’s aggressive increase in interest rates are working, despite an energy price up-tick. The Fed are meeting as we speak, and will deliver their latest interest rate decision tonight (Wednesday PM). Given that the core measure has decreased, the increase in the headline figure is unlikely to be a concern.

And finally, as we record today (Wednesday 20th September) we have had the release of UK CPI inflation. Given the increase in the oil price, it was broadly anticipated that there would be a slight uptick in the headline CPI figure. However, the headline figure fell slightly from 6.8% to 6.7%. The core CPI reading, which central banks care about much more, and excludes volatile items such as food and energy, decreased markedly.

The Bank of England are due to make a decision on interest rates tomorrow (Thursday). We certainly aren’t ruling out the potential for a 0.25% interest rate increase tomorrow to 5.5%, however the bank will be taking data into account, and the decrease in CPI inflation may lead them to feel that they have done enough for now.

As the UK base rate has increased over the last 20 months, so have mortgage rates. The huge number of mortgage holders who will be remortgaging at a higher rate will play a large part in helping to bring down inflation, as disposable income is squeezed and spending power chipped away. Even those who don’t own a mortgage are highly likely to know someone with a mortgage – in 2020, approximately 28% of dwellings in the UK were owned with a mortgage or a loan.
In addition to this week’s Astute Market Overview, we have released an Astute Mortgage Market Overview, in which Joanne discusses how the current environment is impacting the mortgage market.

We’ll take a break from the Astute Market Overview next week, but we’ll be back the following week to discuss the Federal Reserve Open Market Committee meeting, the Bank of England’s Monetary Policy Committee meeting, UK retail sales, and in fact, anything that catches our attention.

See you next time.

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