Market Update

As illustrated in the attached table, markets saw an uptick this week, buoyed by investors' enthusiasm over emerging indicators of waning inflation in the US, fostering a more optimistic economic outlook.
A recent survey from the University of Michigan highlighted a notable rise in US consumer sentiment, further solidifying the optimistic economic projections. June 2023 recorded the US’ annual inflation rate settling at 3%, the most modest since March 2021, slightly undercutting the market's anticipation of 3.1%. A primary driver behind this moderation is the base effect from the prior year when a surge in energy and food prices propelled inflation to peak at 9.1%. Specifically, energy costs dipped by 16.7% from May figures. While general price escalations in the US have eased to a two-year trough, the core inflation rate—which excludes the energy and food sectors—lingers at a marginally elevated level. Nonetheless, June's core inflation recorded the softest rates since 2021, signaling a tempering of price hikes.
This week's positive data trends injected markets with hope that the central bank might be approaching the terminus of its aggressive rate-hike trajectory. US officials are gearing up for a potential quarter-point augmentation in interest rates during their forthcoming July assembly.
Across the pond, in the UK, the GDP figures for May outperformed expectations, showcasing a minimal shrinkage of 0.1% as opposed to the anticipated 0.4% contraction. This slight dip can be traced back to multiple bank holidays, inclusive of the King's coronation. Given these holidays coupled with strikes, gauging the genuine economic health becomes intricate.
The Bank of England is preparing for another rate hike in the coming month, a move propelled by persistently high inflation rates. This looming hike is poised to strain households and businesses, which in turn could dent growth trajectories in the subsequent months. The ripple effects of the series of rate hikes implemented over the last year and a half are still cascading. We advocate prudence before introducing further tightening measures, underscoring the latency inherent in witnessing the full ramifications of prior rate adjustments. With inflation projected to decelerate significantly in the near future, partly attributed to base effects, overzealous tightening in the aftermath of past misjudgments could jeopardize the UK's growth trajectory.
As we step into the following week, the earnings season is primed to kick off, offering a deep dive into diverse economic sectors. The financial domain's reaction to the sequence of bank collapses earlier this year will come under the scanner. Last week, banking giants from the US, including JPMorgan and Wells Fargo, mirrored the robustness of the economy, showcasing continued consumer and business expenditures and borrowings in spite of the swift rate ascents. JPMorgan declared an impressive 67% profit spike for Q2 compared to last year, and Wells Fargo followed suit with a 57% increase, largely fueled by escalated rates amplifying their lending revenue. These stellar performances momentarily cast a shadow over the banking predicaments that surfaced earlier this year.