Weekly Market Update- Week Ending 01/09/2023

It was a positive week for investment markets. Investors clung to weaker-than-expected economic data as a sign that the US economy is starting to cool down and correspondingly, the Federal Reserve will be more inclined to hold interest rates when they next meet on the 19th/20th September.

On Wednesday, the ADP National Employment report showed that the private payrolls rose by 177k last month, below expectations of 195k. The report presents an independent measure of the US labour market based on payroll data covering more than half a million companies. The figure provides further evidence that the very tight conditions seen within the labour market, which have resulted in high wage growth, might be starting to ease.

According to data from the Bureau of Economic Analysis also published on Wednesday, real US gross domestic product (GDP) grew by 2.1% in the second quarter of 2023. The figure was lower than the expected 2.4% and could mean that the resilience of the US economy is finally showing signs of softening following the rapid rise in interest rates. Interest rate expectations fell as a result of the data, with treasury yields lower and the US dollar weaker against most major currencies.

Whilst a pause from any further interest rate rises may now be on the cards in the States, closer to home, it still seems likely that the Bank of England (BoE) will continue to tighten monetary policy when they next meet on the 21st September. With the base rate currently at 5.25%, the market is expecting rates to peak around 5.75%, which is down from 6.5% implied in July.

Key to influencing the BoE, will be CPI inflation data for August, which is released the week prior to their meeting. Having peaked in October at 11.1% (a 41-year high), inflation has trended lower since, reaching 6.8% in the year to July. It remains, however, over 3x the BoE’s 2% target.

John Naylor, Chartered FCSI – Head of Investment Committee