Financial Update from Brewin Dolphin - 9 June 2023

June 2023

The Weekly Round-up

Friday 9 June 2023

In his latest weekly round-up, Guy Foster, our Chief Strategist, gives his view on what next week’s monetary policy meetings could have in store for investors.

This was a very quiet week for financial markets. Moves were fairly modest reflecting, among other things, a lack of really impactful data to drive those moves.

In many ways, it feels like it could be the calm before the storm. Next week, there will be a couple of big monetary policy meetings as well as the publication of the crucial US consumer price index (CPI).

UK labour market in focus

The UK labour market will also be in focus on Tuesday. Although the UK is not setting interest rates until the following week, the stubbornness of UK inflation is certainly a worrying omen for investors. It reflects the vagaries of UK utilities pricing (which means the annual rate of inflation falls quickly after October) and the tightness of the labour market. If the jobs market shows any sign of weakening on Tuesday, especially if it is reflected in lower wage growth, that ought to be welcomed by the Bank of England in its quest to control wage inflation.

Within the UK labour market, there are already sharp deviations. According to data from the KPMG and REC Report on Jobs, there are more opportunities in some sectors than others, while total candidate supply expanded at its fastest pace since the end of 2020. Rates of pay are increasing at a softer, but still excessively strong, pace. So there does seem to be evidence of a turn in the UK labour market and it remains to be seen how quickly that takes hold.

UK interest rates beginning to bite

The markets see UK interest rates rising throughout this year and peaking comfortably above 5%. The sharp increases in interest rate expectations after last month’s inflation shock have led to UK mortgage rates increasing. Subsequently, mortgage providers are scrambling to increase mortgage rates. June and September 2022 saw waves of mortgage deals as buyers rushed to meet the initial and subsequent extended end of the stamp duty holiday. For many of those loans, rates will have doubled. This creates a dilemma for the Bank of England as it tries to estimate the impact of interest rate increases on the rate of inflation, which has been slow to decline. It poses a dilemma for borrowers too, who have benefitted from declining mortgage rates since last year’s controversial mini-budget but are now seeing them increase again. Without the subsequent fiscal restraint, we can assume that interest rates and inflation would likely have been higher still.

Federal Reserve on pause

In the US, the Federal Reserve is expected to hold interest rates next week in what is described as a skip before a subsequent rise in July. The odds of this have fallen significantly, though, as the economy has shown some signs of being a bit weaker. Evidence from surveys has proven ambiguous. Services activity was weak according to the Institute for Supply Management, but strong according to the S&P Global’s purchasing managers’ index, with corresponding weakness and strength in employment. Harder data seems to indicate that even as jobs increase due to people being drawn back into the labour market, job losses are increasing in other sectors. US initial jobless claims picked up significantly and now stand at the level they averaged during 2016. These data make a recession, which had seemed more likely than not, seem a little more likely still.

ECB approaching the finish

One of the differences between the US and European economies is that once you strip out housing costs, services inflation has been slowing quite markedly in the US. That is not the case in the UK, and on the continent the position is quite nuanced. With the European Central Bank (ECB) having been slower to raise rates and some persistence in services inflation, a further increase in rates this month seems very likely, but thereafter things are much more balanced.

With so many big central bank meetings coming up over the next two weeks, some caution comes from a couple of hawkish surprises this week. Both the Bank of Canada and the Reserve Bank of Australia raised rates having been expected to hold them. In both cases, the increases are probably justified but the market felt caution might prevail.

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