Please see below article received from Brooks Macdonald this morning, which concentrates on economic developments in the US and the consequent effects on markets.
- We now enter the second half of the calendar year after a strong Q1 and more mixed Q2 2023.
- Soft PCE data along with consumer spending data suggest price pressures may be fading which helped catalyse the week end rally in markets.
- All eyes on US employment data at the end of the week which will provide further insight to the inflationary outlook.
We now enter the second half of the calendar year after a strong Q1 and more mixed Q2 2023.
The first half of the year, proved to be a strong half for financial markets however it is fairer to say that Q1 was strong and Q2 somewhat more mixed. In terms of the 2023 leader boards, the US technology sector has surged ahead, driven by the mega-cap names and hopes of a generative Artificial Intelligence (AI) revolution. The half-year was capped off by a strong week for equities, with the rally particularly strong on Friday after Friday’s personal spending and Personal Consumption Expenditures (PCE) data suggested that inflation may be moderating in the United States.
Soft PCE data along with consumer spending data suggest price pressures may be fading which helped catalyse the week end rally in markets.
The PCE inflation index for May came in line with market expectations, at 3.8% year-on-year however the core inflation number missed a 4.7% estimate, coming in at 4.6%. The month-on-month increase in US core services inflation was the smallest since June 2022 which helped catalyse the week end rally in markets. Lastly, consumer spending was softer than the market expected which may suggest that some of the demand-side impetus behind the uptick in prices may be fading.
All eyes on US employment data at the end of the week which will provide further insight to the inflationary outlook.
This week’s focus will be on the non-farm payroll report which will give insights into the US employment picture. The headline number of new jobs created is expected to have slowed from 339k in May to 215k in June with average hourly earnings and the length of the workweek expected to be unchanged. While the headline number is expected to ease from the last reading, we are still some way off a level that would imply an imminent recession. A resilient employment report sits in contrast to some of the other lead indicators which are pointing to a slowdown however the outsized strength of the labour market has been a key driver of market inflation expectations so far this year. The Institute of Supply Management (ISM) manufacturing data is out today and is expected to show the US manufacturing sector still in contraction after turning negative in November last year.
With core inflation easing slightly in the US, and the manufacturing sector in clear contraction, the market is awaiting a change in the US employment situation that will bring some of the inflation readings down more decisively. If we see a smaller-than-expected number of new jobs created last month, there will be an expectation that this will filter into weaker hourly earnings in future months which will weigh on consumption as the second half of the year develops.
Please check in again with us soon for further relevant content and market news.
Chloe
04/07/2023