Please see this week’s Weekly Market Commentary update from Brooks Macdonald received late yesterday afternoon:
Hopes grow that China can turn a corner on COVID-19, as Shanghai authorities signal an easing of restrictions ahead
After a difficult week, markets managed a decent bounce on Friday but the mood has soured coming into trading on Monday, following a slew of weaker than expected data out of China. Amongst the data releases, China Industrial production fell -2.9% Year on Year (YoY) vs +0.5% expected, and retail sales was down -11.1% YoY vs -6.6% expected. Despite the disappointment, it’s important to keep in mind that COVID-19 lockdowns in April were the main culprit behind the weaker data, but the good news is that the virus situation looks to be improving. In Shanghai (home to the world’s biggest container port), on Sunday the city reported a second day of no COVID-19 infections outside government-mandated quarantine, and local authorities there have now signalled a timetable for the easing of restrictions and aim to return to normality as early as the start of June. Starting the return to more normal economic activity, on Monday, the city will begin to reopen supermarkets, convenience stores and pharmacies. Elsewhere in China, with the exception of Beijing, outbreaks in rest of the country look to have eased as well. Assuming this all proves durable, it paves the way for a possible rebound in the economic data going forwards.
Inflation on the radar as UK CPI data is due this week, but keep in mind the caveats with year on year comparisons
After last week’s focus on US CPI (Consumer Price Index data), this week sees more CPI prints for the month of April, including the UK on Wednesday. UK April Core CPI (excluding energy and food) is expected to rise to 6.2% YoY, up from 5.7% YoY in March. The UK headline CPI (including energy and food) is expected to grab most of the headlines however, with an expected print of 9.1% YoY, boosted in part by the 54% rise in the energy price cap set by Ofgem which was introduced on 1st April and which is expected to make its way into the latest reading. With inflation still the focus, markets will be trying to gauge whether the more hawkish cadence from central banks over the past few months has started to filter through into any changes in consumer activity. Taking a temperature-check on spending, we have retail sales data due from the US on Tuesday and the UK on Friday. When we look at UK CPI Year on Year inflation prints, it is important to keep in mind that these tell us just as much about what was happening to prices a year ago, as much as it does about what is happening to prices today. For the UK, this time last year, April 2021 YoY Core CPI was running at 1.3%. Back then, the UK economy was still in the process of coming out of lockdown, with non-essential retail shops only opening up midway through the month, and with restrictions on mixing between different households still in place. As such, the April 2022 CPI print due out on Wednesday is going to be comparing a reasonably ‘normal economy’ this year against a somewhat ‘restricted economy’ last year – as such, while the headline prints will undoubtably generate big headlines, we should treat YoY comparatives with a bit of caution.
Sterling is the pressure release-valve as the risk grows of a UK-EU Brexit bust-up over the Northern Ireland Protocol
Speculation is mounting that the UK government might be willing to unilaterally override parts of the Brexit Northern Ireland Protocol, and an announcement on this might come as soon as this week. In response, the EU has warned that the protocol is a ‘cornerstone’ of the wider UK-EU withdrawal agreement and renegotiation is not an option. The prospect of a possible UK-EU Brexit bust-up has fed into currency markets, with Sterling falling to around 1.22 vs the Dollar last week, levels last seen around May 2020 during the height of the pandemic. Expect Sterling to continue to be the immediate pressure release valve, but there is a potential knock-on factor for inflation also: should Sterling see sustained weakness, then this also risks adding to the current inflation pressures, by adding to import costs.
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Andrew Lloyd DipPFS
17/05/2022