Market Update

Investors breathed a sigh of relief this week following a bipartisan agreement to elevate the $31.4tn US debt ceiling, averting a potential default on US fiscal responsibilities. Announced to Congress on Monday, the agreement encompasses significant spending cuts and impactful reforms aimed at elevating individuals from poverty to employment, as emphasized by the Speaker of the United States House of Representatives, Kevin McCarthy. Notably, the proposal does not introduce new taxes or government initiatives. The bill's vote in the House is set for as early as Wednesday (31 May), with Senate deliberations scheduled for later this week or the weekend, targeting a passage before 5 June.
The spotlight then shifted to US unemployment figures and the continued tightening of the job market. Recent data revealed that initial unemployment benefit claims, while surpassing predictions, rose by 4,000 to 229,000. With an influx of unemployment data anticipated, the focus will pivot towards the Fed's forthcoming actions on interest rates, especially in light of the most recent inflation figures.
Data on personal consumption expenditure revealed a 0.4% uptick in April, succeeding a 0.1% increase in March. The core PCE statistics, which excludes volatile food and energy components and serves as the Fed's favored inflation gauge, also experienced a rise. These updates challenge some economists' earlier recession forecasts and further fuel the argument for an interest rate increment.
In the UK, retail sales data painted a picture of resurgence. Sales in April 2023 rose by 0.5%, rebounding from a 1.2% drop in March. This growth, surpassing the 0.3% market expectation, was largely driven by a 1.0% spike in non-food store sales, notably in watches, jewelry, and sports gear.
Germany, the Eurozone's heavyweight, reportedly entered a recession this week. Defined by two consecutive quarters of GDP contraction, Germany's economy shrunk by 0.3% in the recent quarter, succeeding a 0.5% reduction in the last quarter of 2022. Analysts attribute this dip to the compounded effects of escalating energy costs, triggered by the Russia-Ukraine conflict, and inherent weaknesses in Germany's economic structure, which the current government coalition hasn't effectively addressed. The slow pace of China's economic reopening and a global trend of tightened spending have also impacted German exports. Despite these challenges, Chancellor Olaf Scholz remains optimistic about Germany's prospects, emphasizing significant investments in areas like battery and ship manufacturing and urging trust in the country's economic potential.