Weekly Market Update- Week Ending 14/07/2023

It was a positive week for equity markets, with investors cheering better-than-expected inflation numbers in the States. The data on Wednesday showed that consumer price inflation rose at 3% on an annual basis in June, down from 4% in May. The figure was lower than the 3.1% economists had predicted. Having peaked last June at 9.1%, inflation in the States is now at its lowest level since March 2021 and illustrates that the rapid rise in interest rates is starting to take effect.

With the Federal Reserve previously signalling that they plan to increase interest rates when they next meet on the 25th/26th July, the new data has lowered the probability of this happening, but in my opinion, still remains likely. The market took particular comfort from the softening of core inflation (falling from 5.3% in May to 4.8% in June), with investors now forecasting that interest rates will peak at a lower rate and remain elevated for a shorter period.

This lowering of interest rate expectations caused the dollar to fall against most major currencies. It now trades at around 1.31 $/£, a far cry from the levels (1.08 $/£) seen last September when the UK government was in self-destruction mode. A similar but less-pronounced trend can be seen for the euro against the pound, which now trades at a near-year-high level of 1.17 €/£.

Currency appreciation brings both winners and losers. The winners include importers, who benefit from cheaper imported goods (this should help with bringing down UK inflation, particularly food prices in the months ahead) and increased purchasing power. It is also great news for those about to head off on summer holidays. Conversely, it is not good news for our exporters as they face the challenge of their goods becoming pricier for foreign buyers, potentially leading to a decline in demand.

Next Wednesday we get the UK’s consumer price inflation data. Having so far remained stubbornly high, investors are hopeful that a similar trend of softening inflation will be evidenced here. This too could bring down interest rate expectations and help temper the current climbing fixed-rate mortgage deals.

John Naylor, Chartered FCSI – Head of Investment Committee