In our Market Monday Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
US faces more interest rate rises to cool inflation
The US Federal Reserve chairman has said the central bank will continue to raise interest rates "if appropriate" as inflation remains "too high".
Jerome Powell told an annual gathering of central bankers that the pace of price rises had fallen from a peak.
However, it remains above the Fed's 2% target. In the latest data provided by the Federal Reserve, it;s chairman Jerome Powell said interest rates could rise further and stay higher for longer.
US inflation hit 3.2% in the year to July while the key interest rate is 5.25% - the highest in 22 years - and comes after 11 consecutive rate rises since early 2022.
Many in the Federal Reserve believe inflation has moved down from its peak, but it still remains too high.
This development comes as food and energy prices remained volatile, despite headline inflation falling from its high of 9.1% last year.
The latest data also points to the housing market, where activity had not cooled enough. After decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up towards its previous target, but monetary policies will need to remain firm.
The newest available data also hinted that interest rates could begin to come down, if there were required changes in the labour market, where wage growth has continued as employers dished out higher wages to attract staff in a slowly shrinking workforce.
Higher wages, in theory, add to inflation, prolonging the need for higher interest rates.
IMF forecasts German economy to shrink towards the end of 2023
The International Monetary Fund forecasts the German economy will shrink in 2023, therefore making it the only G7 economy to contract this year.
Sticky inflation and three straight quarters of stagnating output have put Europe’s biggest economy into an unfavourable position towards the end of 2023.
The latest IMF forecast currently predicts the nation to be the only advanced economy to shrink this year — with a forecast contraction of 0.3% compared with an average rise of 0.9% for the 20 countries, including Germany, that use the euro currency.
A prolonged recession would be a disappointing outcome for an economy that, in the decade following the 2008-9 financial crisis, grew by an average of 2% a year, boasted a budget surplus for most of that period and saw its exports boom.
Inflation in Germany is running hotter than in most of its European neighbours. Consumer prices rose 6.2% in July compared with the same month in 2022, well above the 5.3% rate averaged across the euro area.
Falling private and public spending were the main drivers of the recession — defined as two consecutive quarters of declining output — that the country logged last winter.
The European Central Bank has hiked its main interest rate to a historic high of 3.75% to help curb rising prices. But a higher cost of borrowing has hit Germany’s residential building sector harder than most.
More than 40% of construction companies responding to a survey by the ifo Institute last month reported a lack of orders, up from 10.8% a year earlier, which provided further uncertainty about the country’s economic situation.
The wider industrial sector, which includes famed manufacturers such as Volkswagen and Siemens, has also taken a knock. Industrial output contracted 1.7% year-over-year in June, the latest official estimates show.
German business activity, spanning both services and manufacturing, dropped in August at the fastest pace since May 2020.
In our Market Monday Insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
UK rents rise at highest rates since 2016
The rising cost of renting has again hit its highest level since comparable records began in 2016, with strong demand from tenants.
With fewer properties available to rent in many areas, the mismatch between supply and demand has pushed up costs for many people.
Prices paid by UK renters rose by 5.3% on average in the year to July, the Office for National Statistics said. The figures come as rising prices continue to squeeze household budgets across the UK.
The inflation rate, which can be used to measure how the cost of living has changed over time, fell to 6.8% in the year to July. Although this was down from 7.9% in June, it is still far above the Bank of England's ongoing target of 2%.
High demand from tenants at the same time as landlords reducing the number of available properties is one of the main reasons behind the rent increase.
The latest data from the Office for National Statistics (ONS) shows the UK average annual rent increase accelerated to 5.3% from 5.2% the month before.
There was a 5.5% increase in rents in London, which was the only region where house prices had fallen. This was observed as the sharpest increase in rent since comparable records began for London in 2006.
The same annual rent rise was recorded in the West Midlands as well as Yorkshire and the Humber.
There were even bigger rises for tenants in Wales, where the average was up 6.5% in a year, and in Scotland (up 5.7%). In Northern Ireland, where the data is collected in a different manner, there was a 9.2% increase in the year to May, although this was lower than a previous peak.
Official data on wages and inflation have led analysts to suggest that there could be further rises in the Bank of England's benchmark rate, which would only place further pressure on landlords and homeowners through relatively high mortgage rates.
Average UK house prices increased by 1.7% annually, down from a revised 1.8% rise in May, the ONS said, as the market cools as a result of the mortgage rate hikes.
China cuts key interest rate as economic recovery falters
China's central bank has cut one of its key interest rates for the second time in three months as the world's second-largest economy struggles to bounce back from the pandemic.
The People's Bank of China (PBOC) lowered its one-year loan prime rate to 3.45% from 3.55%. The country's post-Covid recovery has been hit by a property crisis, falling exports and weak consumer spending.
In contrast, other major economies have raised rates to tackle high inflation. The PBOC last cut its one-year rate - on which most of China's household and business loans are based - in July.
Economists had also expected the bank to lower its five-year loan prime rate, which the country's mortgages are pegged to. However, it was unchanged at 4.2%.
In a surprise move last week, short and medium-term rates were also cut.
China's economy has struggled to overcome several major issues in the wake of the pandemic, which saw much of the world shut down.In the same week, official figures showed China had slipped into deflation for the first time in more than two years.
That was as the official consumer price index, a measure of inflation, fell by 0.3% last month from a year earlier.
Meanwhile, official figures showed China's imports and exports fell sharply in July as weaker global demand threatened the country's recovery prospects.
Beijing has also stopped releasing youth unemployment figures, which were seen by some as a key indication of the country's slowdown.
In June, China's jobless rate for 16 to 24-year-olds in urban areas hit a record high of more than 20%.
US inflation continues to decelerate
Although headline inflation rebounded slightly in July, the underlying data suggests that US inflation continues to decelerate, providing welcome news for the Federal Reserve.
In July, consumer prices in the US were up 3.2% from a year earlier, higher than the 3% increase seen in June. However, prices were up only 0.2% from the previous month. In fact, in four of the last five months, monthly inflation was no higher than 0.2%.
The weakness of inflation is still largely driven by declining energy prices, which were down 12.5% in July from a year earlier and up only 0.1% from the previous month. Also, airline fares were down 18.6% from a year earlier and down 8.1% from the previous month.
On the other hand, food price inflation continues to be elevated, with food prices up 4.9% from a year earlier. Another source of underlying inflation was housing costs. These prices were up 7.7% from a year earlier, which was down from the previous month at 0.4%. In the past year, after a period of sharply rising home prices, these prices have stalled and even declined.
Over time, this will work its way into the shelter component of the consumer price index (CPI), thereby helping to reduce inflation during the second half of 2023. In fact, excluding shelter prices, the CPI was up only 1% in July from a year earlier. Excluding shelter and food, the CPI was unchanged from a year earlier.
Recall that, early in this era of high inflation, the majority of price increases were due to a surge in the costs of durable goods. That, in turn, was related to the pandemic-driven rise in demand for such goods across the US.
Now, after two years of declining demand for durables, prices of durables are declining. They were down 1.4% in July from a year earlier. Prices of nondurable goods were down 0.2% in July from a year earlier. Excluding food, nondurables prices were down 5.3%.
The services sector, on the other hand, accounts for plenty of inflation. Service prices were up 5.7% in July from a year earlier, heavily driven by shelter. The problem with service inflation is that the provision of services is highly labour-intensive.
With wages now rising faster than inflation, the danger is that the cost of providing services will continue to rise rapidly, thereby requiring companies to boost prices absent offsetting increases in productivity. The tightness of the labour market is one of the reasons for rising wages observed across the country.
In our Market Monday insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.]
Bank of England raises interest rates by a half point to 5%
The Bank of England has raised interest rates again by a half point to 5% as it ramps up its efforts to tackle stubbornly high inflation.
In what will be seen as a major move, the Bank’s monetary policy committee (MPC) increased rates for the 13th consecutive time to the highest level since 2008 as a spike in inflation takes hold.
Before the decision was announced, financial markets were evenly split on whether the Bank would vote for a half-point rise or a smaller quarter-point increase.
The latest rise in borrowing costs comes after figures on Wednesday showed inflation remained unchanged at 8.7% in May, driving expectations that the central bank would have no choice but to respond. Inflation was expected to fall to 8.4%, which would still have been well above the Bank’s recent 2% target.
The Bank said that it would continue to watch for persistent inflationary risks, and would push interest rates higher if absolutely necessary. Financial markets reacted to the rate hike by betting the central bank would be forced to raise its base rate above 6% before the Christmas period.
Experts warned the recent approach from the central bank to squeeze high inflation out of the system risked tipping Britain’s economy into recession, as tougher increases in borrowing costs only reduce households’ disposable income and drastically decrease consumer demand for goods and services.
The move comes as households across the country face a massive surge in mortgage repayments as the impact from earlier rate hikes trickles through to the cost of home loans, in a development heaping pressure on the government as millions of families struggle with soaring bills.
In a recent fortnight of turmoil in the mortgage market, high-street lenders and building societies had rushed to pull hundreds of cheaper deals on new home loans before the Bank’s latest decision, while pushing up the cost of a typical two-year fixed-rate mortgage above 6% – the highest level since Liz Truss’s disastrous mini-budget in the autumn of 2022.
European business activity slows in June as higher interest rates begin to bite back
Business activity growth in Europe slowed in June, pointing to a difficult end to the second quarter, according to preliminary data Friday.
The euro zone’s flash composite Purchasing Managers’ Index dropped to 50.3 in June from 52.8 in the previous month. This was below the 52.5 expected by analysts. A reading above 50 marks an expansion in activity, while one below 50 marks a contraction.
The European Central Bank has been increasing interest rates consistently for the past 12 months in an effort to bring down inflation. Higher rates can lead to higher costs for companies across the bloc, however, and so often become a drag on output.
On a country-by-country basis, data earlier in the day from Germany also showed a slowdown in Europe’s largest economy. The German flash composite PMIs fell to 50.8 in June from 53.9 in May. This was below market expectations.
Germany entered a technical recession in the first quarter of the year, after contracting 0.3% over the three-month period. In the final quarter of 2022, Germany’s economy shrunk by 0.5%.
It was a similar story in France, where the composite PMI sunk to 47.3 from 51.2 in May, well below the 51 expected. This was primarily due to weakness in the services sector.
Euro zone bond yields extended their falls following data, with the yield on the 2-year German bund dropping to 3.17% in early trade and the yield on the 10-year benchmark lowering to 2.36%. An economic slowdown tends to be negative for bond yields.
Turkey hikes interest rates as Erdogan looks for economic U-turn
Turkey has hiked its main interest rate from 8.5% to 15%, reversing one of President Recep Tayyip Erdogan's unorthodox economic policies.
The 6.5-point rise was far lower than economists were previously expecting, but it marked a major shift in policy by his new economic department brought in to tackle rampant inflation. Turkey's leader has until now insisted on keeping interest rates down for the foreseeable future.
Inflation is almost 40% and the country is firmly in the grip of a cost-of-living crisis. The head of Turkey's central bank, Hafize Gaye Erkan, was only recruited from the US this month in the wake of Mr Erdogan's re-election as president as he looked to make sweeping economic changes.
Her decision marks the first rise in interest rates since December 2020, after a turbulent period in which three central bank governors were fired in less than two years, as they sought to stick to orthodox economic policies.
Although the increase almost doubles Turkey's policy rate to 15%, it is far less than many economists had forecast. US-based investment bank Morgan Stanley had suggested it would go up to 20%, while Goldman Sachs said it could hit 40%.
In its statement the bank's monetary policy committee made clear that Thursday's move was the start of a gradual process, with the target of bringing inflation down to 5%.
President Erdogan's problem is that Turkey's inflation rate remains stubbornly high and its central bank's reserves have fallen to drastically low levels, after it spent billions of dollars previously trying to prop up the declining lira.
Interest rates have come down from 19% two years ago to 8.5% in recent months and the change in direction will have repercussions for a country already in an economic crisis.
Turkey's economy had grown dramatically in the early years of President Erdogan's leadership. But in recent years, he has ditched the traditional economic approach by blaming high inflation on high borrowing costs and is now seeking to stimulate economic growth as a result.
In the past five years, the Turkish currency has lost more than 80% of its value and foreign investment has plummeted. Turks are now trying to move foreign cash out of local banks.
In our Market Monday insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
Eurozone in recession as rising prices hit spending
The eurozone fell into recession this winter, revised figures show, as consumers were hit by rising prices.
The economy of the 20 nation-bloc contracted by 0.1% between January and March, after also shrinking in the final three months of 2022. As in other regions, the eurozone has been hit by rising food and energy prices that have weighed on households.
Spending by households in the bloc fell by 0.3% in the first three months of 2023, and by 1% in the previous quarter. Initial growth estimates had suggested that the eurozone had avoided a recession and expanded by 0.1% in the first three months of the year. But the latest updated figures from Eurostat showed it had shrunk in the first quarter.
Revised data from Germany - Europe's largest economy - contributed to the move into recession. Last month, Germany said it had fallen into recession at the start of the year after its economy contracted by 0.3% between January and March.
The bad news comes after a tough year for European economies, as surging energy prices sparked by Russia's war on Ukraine have driven up the cost of living.
The European Central Bank has responded by raising interest rates by 3.75 percentage points, in a bid to cool soaring prices.
Ireland's economy shrank by 4.6% in the first three months of 2023 compared with the previous three months. Compared with the same period last year, its economy contracted by 0.3%.
Lithuania's economy was hit hardest compared with last year - its economy shrunk by 3.7%.
Japan’s GDP revised at higher level, with a growth of 2.7% in the first quarter
Japan’s economy grew an annualised 2.7% in the first quarter of the year, expanding further than earlier estimates of 1.6% made last month, with the latest government data.
Economists surveyed by Reuters had expected to see growth of 1.9%. The Japanese yen strengthened by 0.14% to 139.98 against the U.S. dollar shortly after the release, while the Nikkei 225 rose 0.17% and the Topix was up 0.2%. Quarter-on-quarter, the economy expanded by 0.7%, beating estimates by Reuters of 0.5%.
Private non-residential investment, or capital spending, rose 1.4% — higher than initial government estimates of 0.9%. Private demand rose by 1.2% and domestic demand rose by 1%, while exports of goods and services dropped 4.2%. Imports also fell 2.3%, the recently revised government data showed.
The upside surprise for Japan’s economic growth comes as stocks remain in focus after recently notching new three-decade highs thanks to a weak yen and plans for structural reforms.
Factory activity in the economy expanded for the first time since October 2022, a Purchasing Managers’ Index published last week showed. The reading stood at 50.6, ending a six-month streak of readings below the 50-mark that separates expansion and contraction.
The resilience seen in the Japanese economy as global growth braces for a further slowing, as a result of central banks sharply raising interest rates, could be short-lived, Senior Economist Norihiro Yamaguchi of Oxford Economics said.
In the coming months, many predict the economy will maintain resilience with more room for built-up demand and more businesses are seeing greater opportunity for investment in the fiscal year.
But further headwinds are expected due to a delayed effect on external factors affecting the Japanese economy, he added.
Australia’s economy expands 2.3% in the first quarter, the slowest growth in just under two years
Australia’s first-quarter gross domestic product expanded by 2.3% year-on-year, just slightly below analyst expectations.
Economists polled by Reuters had forecast an expansion of 2.4%, compared to the 2.7% expansion in the fourth quarter of 2022. On a quarter-on-quarter basis, GDP grew by 0.2%, compared to the 0.3% expected in the Reuters poll.
This is the sixth straight rise in quarterly GDP for the country, but the slowest growth since the Covid-19 Delta lockdowns in the September quarter of 2021.
The GDP readings are key to the Reserve Bank of Australia’s decision making process for its monetary policy. Just on Tuesday, the RBA surprised markets and raised its benchmark policy rate by 25 basis points to 4.1%, an 11-year high.
Many governors have looked to reiterate that the central bank will seek to navigate a narrow path in the country’s monetary policy.
In this narrow path that many envision, Australia’s inflation will return to its 2% to 3% target range, the economy will continue to grow, and gains in the labour market are preserved.
Many think that while GDP has slowed and is forecast to slow more, productivity growth will continue to remain low as a result.
The latest observations see that GDP per hour worked fell by 0.3% quarter-on-quarter in the period, resulting in a 4.6% annual fall in productivity — the largest on record.
He also adds that most recent labour market data suggests that productivity will most likely have weakened further this quarter, which will in turn prop up unit labour cost growth and keep services inflation stubbornly high.
Many predict the current peak estimate of 4.35% for the RBA’s benchmark rate, but in light of the GDP readings and government planning, many think that there is a real risk that the RBA could raise rates even higher as a result.
German economy in recession after high prices take toll, revised figures reveal
The latest figures show Germany has entered a recession, after high prices took a bigger toll on the country’s economy than originally anticipated.
Data from the Federal Statistical Office showed Europe’s largest economy contracted by 0.3% in the first quarter of 2023, compared with the previous three months, when it shrank by 0.5%. The technical definition of a recession is two consecutive quarters of contraction.
A previous estimate suggested Germany had narrowly avoided recession with 0% growth in the first quarter.
The national statistics office stated on Thursday that while private sector investment and construction grew at the start of the year, this was offset in part by a drop-off in consumer spending as higher prices forced households to rein in spending.
Overall, combined household spending dropped 1.2% in the first quarter, with shoppers less willing to spend more on food, clothes, and furniture. Government spending also dipped by 4.9% compared with the previous quarter.
The war in Ukraine has unsettled both businesses and consumers, both holding back on investing and buying respectively, which has severely impacted demand. Interest rate rises by the European Central Bank have so far had very little influence on reducing inflation, which stands at 7% across the eurozone.
Considerably higher heating costs, despite government subsidies, mean German consumers were holding back on spending on other areas of the economy.
The Ifo Index – Germany’s most prominent leading monthly indicator, showed a continuing weak backdrop for businesses. In May it sank again for the first time in half a year. All sectors apart from services were observed to be on the decline.
The state-owned investment and development bank KfW said this week it expected German GDP to shrink by 0.3% overall this year. It added that two-thirds of the most recent downturn may be caused by more work days being lost in 2023 to public holidays than the previous year.
Oil prices rise as Saudi Arabia pledges output cuts
Oil prices have risen after Saudi Arabia said it would make cuts of a million barrels per day (bpd) in July.
Other members of Opec+, a group of oil-producing countries, also agreed to continued cuts in production in an attempt to shore up flagging prices. Opec+ accounts for around 40% of the world's crude oil and its decisions can have a major impact on oil prices.
In Asia trade on Monday, Brent crude oil rose by as much as 2.4% before settling at around $77 a barrel. Opec+ said production targets would drop by a further 1.4 million bpd from 2024.
The seven hour-long meeting on Sunday of the oil-rich nations came against a backdrop of constantly falling energy prices. Oil prices soared when Russia invaded Ukraine last year, but are now back at levels seen before the conflict began in a welcome return for all.
In October last year Opec+, a formulation which refers to the Organization of Petroleum Exporting Countries and its allies, agreed to cut production by two million bpd, equating to 2% of global demand.
In April this year the group agreed to further cuts, which were due to last to the end of this year. Oil producers are grappling with falling prices and high market volatility amid the Russian invasion of Ukraine.
The West has accused Opec of manipulating prices and undermining the global economy through high energy costs. It has also accused the group of siding with Russia despite sanctions over the invasion of Ukraine.
In response, Opec insiders have said the West's monetary policy over the last decade has driven inflation and forced oil-producing nations to act to maintain the value of their main export.
European economy expected to grow faster than forecast, state EU economists
Europe’s economy is expected to grow faster than previously thought this year and next, despite high inflation and rising interest rates, according to the latest figures from the European Commission.
The commission said the EU’s 27 members would grow at an average of 1% in 2023, up from a previous estimate of 0.8%. It nudged its forecast for growth in 2024 to 1.7% from 1.6%. With this information, the eurozone’s 20 members are expected to grow by 1.1% on average and 1.6% next year.
By comparison, the UK economy is expected to be weaker, with growth of 0.25% expected this year and 0.75% in 2024, according to the latest figures published by the Bank of England.
With fears of a recession easing, EU growth so far this year has been much stronger than expected when the last growth estimates were made in February. Ireland will lead the EU growth league over the next two years as it has done for the past two years.
Dublin is forecast to enjoy a growth rate of 5.5% and 5% in 2023 and 2024, respectively, after amassing a growth rate of 13.6% in 2021 and 12% in 2022.
France’s growth rate will accelerate from 0.7% in 2023 to 1.7% in 2024 while Germany’s economy, which was hit hardest by sanctions on Russian gas, is expected to expand by 0.2% this year and 1.4% next year.
Estonia and Sweden are the only EU countries to suffer a contraction this year – Sweden by 0.5% and Estonia by 0.4%, before both make modest recoveries in 2024.
For the first time, European Commission officials have examined the prospects for Ukraine’s economy in its quarterly forecast – a move made in response to Brussels accepting the war-torn country as a candidate for EU membership last year.
In this time period, Ukraine had demonstrated a remarkable resilience during the war and much of its economy was able to continue operating.
Ukraine’s GDP is estimated to have slumped by 29% in 2022. This year growth is expected to be just 0.6%, rising to 4% in 2024, the commission said, although the ongoing path of the war will be crucial to the outcome for expected economic growth.
China’s economic data misses expectations as economy continues to show an uneven path to recovery
China’s economic data for April missed expectations as the economy continued to show an uneven path of recovery from the impact of its stringent Covid restrictions.
Industrial production for April rose by 5.6% year-on-year, compared to the 10.9% expected by economists surveyed in a Reuters poll. The figure was up 3.9% in March following a muted start to the year.
Retail sales rose by 18.4% – lower than economists’ forecast of a surge of 21%. Fixed asset investment rose by 4.7%, against expectations of 5.5%. The reading rose 5.1% the previous month.
China stocks have pared most of the gains seen this year. The Shenzhen Component was down 4.67% quarter-to-date and up only 1.48% year-to-date, seeing a 9.5% drop from its peak in early February.
China’s latest data follows a mixed picture in the country’s growth trajectory, with services remaining a bright spot in the economy despite factory data falling into contractionary territory in April.
The Caixin China general manufacturing purchasing managers’ index fell to 49.5 in April, marking the first reading below the 50-mark in three months. The 50-point mark separates growth from contraction.
The National Bureau of Statistics’ manufacturing PMI also fell to 49.2 in April from March’s reading of 51.9.Imports for the month also plunged further by 7.9%, missing estimates – exports rose 8.5%.
The latest data included a 20.4% youth jobless rate, the unemployment rate between ages 16 and 24. The reading in April marked a record high.
Citi economists said youth unemployment remains a consistent problem, despite an overall steady labour market – with the latest data showing that the surveyed jobless rate dipped to 5.2% in April from 5.3% in March.
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The UK grew only weakly in the first three months of the year with the economy hit by strikes, cost of living pressures and impacts of wet weather.
The economy grew by just 0.1% between January and March, figures showed, and it remains smaller than levels seen before the Covid pandemic.
The UK is also lagging behind growth seen in other major economies. On Thursday, the Bank of England said it was more optimistic about prospects, and the UK would avoid a recession.
Its comments came after the Bank increased interest rates to 4.5% from 4.25% as part of its continued attempt to slow soaring prices.
The ONS figures showed that while the economy grew slightly over the first three months of 2023, in March it contracted by 0.3%, with car sales and the retail sector having a bad month.
The economy is still 0.5% smaller than pre-pandemic levels, the ONS said. While the UK outperformed Germany in the first three months of the year, many other major economies grew faster in the same period, further reinforcing the poor economic output encountered across the UK.
The economy just about grew in the first quarter of this year, but at 0.1% that was by the smallest possible margin. The fall in March, the latest month, is of some concern with the service sector going into a decline, and car sales continuing to disappoint.
While the engine of growth in the economy is on, the UK is going to have to wait a little longer for the impacts of this to be felt.
G7 finance ministers warn of ‘uncertainty’ on global economic outlook
G7 finance ministers have warned of “heightened uncertainty” surrounding the global economy and the need to address regulatory gaps in the banking system in the wake of the most recent financial sector disruption.
The global economy has shown resilience against multiple shocks, was the statement multiple finance ministers of the world’s most advanced economies said in their final communique after a three-day ministerial meeting in Japan on Saturday.
However, many voiced their opinions regarding a need to remain vigilant and stay agile and flexible in enforcement of economic policies in the wake of recent economic predictions.
The finance ministers also noted the need to fill data, supervisory and regulatory gaps in the banking system that have emerged following the March collapses of Silicon Valley Bank and Signature Bank and the failure of First Republic in recent weeks.
The US and its G7 partners have made removing sanctions loopholes and combating evasion their key priority in recent months as, more than a year after Russia’s full-scale invasion of Ukraine, the appetite for imposing restrictions on various parts of Russia’s economy wanes.
Against that backdrop, the finance ministers also agreed to strengthen sharing of intelligence on possible sanctions dodging, and monitor the effectiveness of the price caps on Russian crude oil and petroleum products.
The G7 nations have also committed to providing economic support of $44bn to Ukraine, enabling the IMF’s approval of a four-year lending programme worth $15.6bn as a result.
According to people briefed on the ongoing discussions, Brussels is also discussing restrictions on certain EU exports to countries that it suspects are re-exporting various sanctioned products to Russia to prevent critical components from ending up in the midst of the ongoing conflict.
US inflation below 5% for first time in two years
Prices for various products such as milk, airline tickets and new cars fell across the US last month, helping to drive inflation down to its lowest rate in two years.
Inflation was 4.9% in the 12 months to April, the latest official figures show. This value was down from 5% in March, and marks the tenth month in a row that price rises have slowed across the country.
The fall comes after the US central bank has sharply raised interest rates to try to control inflation. And this unfolded as Inflation in the US peaked last June at 9.1% - the highest it has been since 1981.
But officials have hesitated to declare further success, as a problem that once seemed contained to particular sectors - such as energy and manufactured goods - has spread rapidly throughout the economy.
Housing, petrol and used car prices all jumped from March to April. The cost of haircuts, veterinary visits and gardening services has also climbed.
And though no longer rising uncontrollably, overall prices continue to rise far more quickly than the 2% rate the Federal Reserve considers sustainable.
Core inflation - which does not include food and energy prices, which change frequently - rose by 5.5% in the 12 months to April.
The Federal Reserve has raised interest rates 10 times since last March, bringing them to the highest levels since 2007 as multiple attempts to contain the rising rates have not been successful.
The latest moves are intended to discourage people from borrowing, leading economic activity to slow and easing the pressures that are continuing to push up prices.
Economists have also stated the latest figures could help convince policymakers to pause, but they warned that progress remains tentative rather than the desired rapid response.
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Bank of England hikes interest rates again following inflation shock
The Bank of England has once again hiked interest rates by a quarter of a percentage point Thursday, extending its long-running fight to rein in prices after a surprise increase in inflation observed in February.
The central bank’s 11th consecutive rate hike takes benchmark borrowing costs to 4.25%, the highest since October 2008. Like other major central banks, it has pushed ahead with raising rates despite recent turmoil in the banking sector in the race to deal with the fallout of banking collapses in both the US and EU.
The Bank of England said in a statement that since its last meeting in February, inflation had surprised significantly on the upside and the near-term path of GDP was likely to be somewhat stronger than previously expected.
Employment growth had also been more robust than anticipated and household disposable income was now expected to remain flat in the near term, rather than falling significantly after the government extended its support for energy bills.
It said that it would raise rates further if there were to be evidence of more persistent price pressures.
UK consumer prices surged by 10.4% in February compared with a year ago, the first observed rise in inflation in over four months, as food prices soared and the cost of visiting restaurants and hotels increased.
The turmoil in the banking sector has increased uncertainty over the inflation outlook, because banks are now widely expected to quickly tighten their lending criteria, which would weigh on consumer demand and business investment, and therefore alleviate any further price pressures as a result.
The Bank of England said it would continue to closely monitor any effects from the banking crisis on credit conditions faced by households and firms, with it adding that the UK banking system remains resilient in spite of the recent global financial worry.
IMF chief warns global financial stability at risk from recent banking turmoil
The head of the International Monetary Fund has warned that the global economy faces risks to its financial stability because of the recent developments in the disrupted banking sector.
Kristalina Georgieva, the managing director of the Washington-based IMF, gave a stark warning that the rising interest rates had drastically increased pressure on debts, leading to stresses in leading economies, including among the key lenders of the global financial markets.
Georgieva said the world economy would expand by just 3% in this year as rising borrowing costs, combined with the war in Ukraine and scarring from the Covid-19 pandemic, would continue to suffocate economic growth.
Adding to a growing list of concerns from economic leaders, the IMF chief said it was clear that risks to financial stability had taken a dramatic turn after the recent collapse of Silicon Valley Bank and the Swiss-government brokered emergency rescue of Credit Suisse by UBS.
Investors will be keenly watching shares in Deutsche Bank when European markets reopen on Monday after they led the sell-off in banking stocks on Friday of last week as the fallout from financial struggles continues.
Her stark comments came as the European Central Bank (ECB) said the recent turmoil in banking would have a real-world impact on business and growth not only in Europe but globally as well.
The EU central bank fears problems in the banking sector will result in lower growth and dampen inflation, which was echoed by ECB vice-president Luis de Guindos.
As economic stress increases in the UK, EU and the US, so-called shadow banks, a term for non-bank financial institutions, could further expose cracks in the financial system, thus leading to even further financial disruption as a result.
This statement came as regulators in Switzerland continued to grapple with the fallout from the collapse of Credit Suisse. Public pressure has mounted on regulators after a vast package of support for the bank in the wake of its emergency merger with fellow Swiss bank UBS.
The controversies over the recent bailout have added to concerns over the global financial crisis caused by the recent toppling of major financial institutions in the US and Switzerland as the shaky period for the world economy continues.
US government raises interest rates despite recent banking turmoil
The US central bank has raised interest rates again, despite fears that the decision could add to financial turmoil after a string of bank failures.
The Federal Reserve increased its key rate by 0.25 percentage points, calling the banking system "sound and resilient" after the recent key events in the US banking crisis.
But it also warned that fallout from the bank failures may hurt economic growth in the months ahead, with the Federal Reserve raising borrowing costs in a bid to stabilise prices as economic woes continue.
But the sharp increase in interest rates since last year has led to further strains appearing in the banking system.
Two US banks - Silicon Valley Bank and Signature Bank - collapsed in March, buckling in part due to problems caused by higher interest rates introduced in recent months.
There are now concerns about the value of bonds held by banks as rising interest rates may make those bonds less valuable with each passing rate hike.
Banks tend to hold large portfolios of bonds and as a result are sitting on significant potential losses, which is further adding to the visible concerns seen in banks across the US.
Falls in the value of bonds held by banks are not necessarily a problem unless they are forced to sell them, which could become a reality if the struggles continue.
Authorities around the world have said they do not think the failures threaten widespread financial stability and need to distract from efforts to bring inflation under control.
Last week, the European Central Bank raised its key interest rate by 0.5 percentage points in a further response to the banking crisis which has seen various global impacts.
UBS shares slide 10% as Credit Suisse shares drop by over 60% in the wake of takeover rescue deal
Shares of Credit Suisse and UBS led losses on the pan-European Stoxx 600 index on Monday, shortly after the latter secured a 3 billion Swiss franc ($3.2 billion) “emergency rescue” of its troubled domestic competitor.
Credit Suisse shares collapsed by 60%, whilst UBS traded 10% lower. This led to further decline in Europe’s banking index, which was down nearly 2% around the same time, with lenders including ING, Deutsche Bank and Barclays all falling by over 4%.
The declines come shortly after UBS agreed to buy Credit Suisse as part of a cut-price deal in an effort to stem the risk of contagion to the global banking system in the wake of the SVB collapse last week.
Swiss authorities and regulators helped to facilitate the deal, announced Sunday, as Credit Suisse looked dangerously close to initial collapse.
The size of Credit Suisse was a concern for the banking system, as was its global footprint given its multiple international subsidiaries. The 167-year-old bank’s balance sheet is around twice the size of Lehman Brothers’ when it collapsed, at around 530 billion Swiss francs at the end of last year.
The UK population faces the biggest fall in spending power for over 70 years as inflation continues to bite
People face their biggest fall in spending power for 70 years as the surging cost of living eats into wages.
The government's independent forecaster said that household incomes - once rising prices were taken into account - would drop by over 6% this year and into next year as well.
Living standards won't recover to pre-pandemic levels until 2027, which was revealed as Chancellor Jeremy Hunt said the economy would shrink this year but avoid recession in his latest spring budget announcement.
Energy and food bills have shot up due to the war in Ukraine and pandemic, and are squeezing household budgets as the current rate of inflation sits in double digits.
It is set to more than halve to 2.9% by the end of this year, according to the Office for Budget Responsibility (OBR). But for now, the figure remains very high, and well ahead of average wages as the cost of living crisis continues to worsen.
The drop in real household disposable income would represent the largest two-year fall in living standards since records began in the 1950s, only emphasising the seriousness of the situation.
The OBR looks at the government's tax and spending plans in the Budget and then predicts how the country will perform over the next five years.
Previously it had expected the UK to fall into recession at the end of last year and continue to shrink all of this year. The last time the UK's economy went into recession was in 2020, at the height of the coronavirus pandemic.
The OBR now expects the UK economy to contract by 0.2% this year but avoid a recession, before an observed growth by 1.8% in 2024, 2.5% in 2025 and 2.1% in 2026.
Argentinian inflation soars past the 100% mark
Argentina's inflation rate has soared past 100% for the first time since the end of hyperinflation in the early 90s as the country's economic crisis continues to take hold.
Inflation hit 102.5% in February, the country's statistics agency said, meaning the price of many consumer goods has more than doubled since 2022.
The Argentinian government has been trying to stem price rises by capping the prices of food and other products.
But the food and drink sectors recently saw the most dramatic increase, with prices growing by 9.8% in February compared to January.
The Argentinian government has long tried to contain inflation, but divisions have marred the country's economic policy as it looks to combat the continued rise in inflation levels.
In December, the International Monetary Fund (IMF) approved another $6bn (£4.9bn) of bailout money as the country looked to ease economic troubles.
It was the latest payout for Argentina in a 30-month programme that is expected to reach a total of $44bn.
In our Market Monday insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
Drastic drop in Silicon Valley Bank shares, triggers slump in global financial sector trading
Shares in banks around the world have fallen after troubling factors at one US bank sparked fears of a wider problem for the financial sector.
Shares in Silicon Valley Bank (SVB), a key player in money lending to technology start-ups, plunged after it announced plans to further shore up its finances in the wake of financial difficulties.
This had a knock-on effect, with the four largest US banks losing more than $50bn in market value which was accompanied by bank shares in Asia and Europe falling sharply at the end of last week.
Among the UK banks, HSBC shares fell 4.8% and Barclays dropped 3.8%.
SVB's shares saw their biggest one-day drop on record on Thursday the 9th March, after they plunged by more than 60% and lost another 20% in after-hours trade as investors looked to offload shares in an attempt to avoid further losses.
This slide came a day after the bank announced a $2.25bn (£1.9bn) share sale to boost its finances in the midst of the challenging economic situation.
In the wider market, there were concerns about the value of the bonds held by banks as rising interest rates continue to make these bonds less valuable over time.
Central banks around the world - including the US Federal Reserve and the Bank of England - have sharply increased interest rates as they try to curb inflation in response to the growing economic situation.
Banks tend to hold large portfolios of bonds and as a result are sitting on significant potential losses.
The continued fall in the value of bonds held by banks is not necessarily a problem unless they are forced to sell them if the current economic situation continues to worsen.
UK economy rebounds by 0.3% ahead of Jeremy Hunt’s Spring Budget announcement
The U.K. economy grew by 0.3% in January, with official figures shown on Friday, exceeding current expectations as it continues to fend off an inevitable recession in Q1 of 2023.
Economists polled by Reuters had projected a 0.1% monthly increase in GDP.
The services sector grew by 0.5% in January 2023, after falling by 0.8% in December 2022, with the largest contributions to economic growth in January 2023 coming from education, transport and storage, human health activities, and arts, entertainment and recreation activities, all of which have rebounded after apparent declines in December 2022.
Production output fell by 0.3% in January after growing 0.3% in December, while the construction sector dropped by 1.7% in January after flatlining the previous month.
The U.K. economy showed no growth in the final quarter of 2022 to narrowly avoid a recession, but it was found it shrunk by 0.5% in December.
The U.K. remains the only country in the G-7 major economies that has yet to fully recover its lost output during the Covid-19 pandemic. With the ONS stating on Friday that monthly GDP is now estimated to be 0.2% below its pre-pandemic levels.
Both the Bank of England and the Office for Budget Responsibility have recently forecast a five-quarter recession which kickstarts in the first quarter of 2023, but the data has so far exceeded expectations with positive results on display.
Despite the better-than-expected January print, economists still broadly believe activity is on a downward trajectory, as high inflation continues to eat into household incomes and business activity.
U.K. inflation slowed to an annual 10.1% in January, continuing to shrink after hitting a 41-year high of 11.1% in October but staying well above the Bank of England’s 2% target which is considered sustainable.
US jobs growth remains strong despite continued rate rises
Jobs growth in the US remained strong last month, as the world's largest economy continued to defy expectations of a slowdown as the economic outlook remains bleak.
Employers added 311,000 jobs in February, more than expected, with bars and restaurants driving the gains observed across the nation.
The unemployment rate however, continues to edge higher with an increase in February of 3.6%, marginally increased from 3.4% in January, which had been the lowest rate since 1969.
The US central bank is trying to cool the economy to ease the pressures pushing up prices as the battle to wrestle back economic shortfalls continues.
However, the US employment market has been resilient, even as the federal bank continues to raise interest rates to the highest levels since 2007.
While this rate has fallen since last summer, it remains far higher than the 2% rate that most central banks consider a sustainable level.
February's job gains followed a surge of hiring in January that surprised economists across the country.
The tight labour market has helped to further push up wages, with average hourly pay in February 4.6% higher than a year earlier, according to the latest data report published by the US Labor Department.
Despite this robust labour market, many analysts say there is a high risk that the US economy will slow sharply and tip into a recession if the economic shortfalls continue.
In our Market Monday insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
Chinese stocks fall on modest growth targets, whilst Hong Kong shares display a slight improvement.
China stocks fell after Beijing introduced a new modest economic growth target of 5% for 2023, undercutting expectations of a big economic push, whilst Hong Kong shares rose slightly in the light of this recent news.
China’s blue-chip CSI 300 closed down 0.5%, while the Shanghai Composite Index lost 0.2%.
Hong Kong’s Hang Seng Index was up 0.2%, and the China Enterprises Index was little changed.
China has recently announced a modest target for economic growth this year of around 5%, as it looks to kickstart the annual session of its National People’s Congress (NPC), which is set to implement the biggest government shake-up in over a decade of national politics.
This latest shakeup of the economic leadership’s focus in 2023 can help to provide investors further clues on the economic outlook of the Chinese economy as it looks to rebound from a disappointing start to the fiscal year.
Further economic information was provided on Chinese stocks with the performance of The CSI Defence index, which gained 1.2% after China said it will look to further boost defence spending by 7.2% across 2023.
The CSI Telecom index rose 1.2%, while the Coal index and Energy index dropped 2.4% and 1.3%, respectively.
A similar trend was also seen in the Hong Kong market, with the Hang Seng Telecom index up 3.0%, while shares of mainland properties down 0.7%.
Tech giants in Hong Kong declined 0.8%, with Tencent down 1.3% and Alibaba losing 0.9%.
Euro zone inflation softens to 8.5% in February as the ECB signals interest rate hiking is set to continue for the foreseeable future.
New data fresh out of the euro zone on Thursday suggested that inflation is taking a while to come down significantly, further raising prospects of new rate hikes in the coming months.
Headline inflation figures across the 20-member bloc came in at 8.5% in February, according to preliminary data released which hinted towards further interest rate increases as the measures to combat inflation are continued.
Further indication that prices are not coming down at the pace that had been registered in recent months could be seen with the headline inflation standing as high as 10.6% in October, but this number reached a revised 8.6% in January as disappointment continued.
Analysts were expecting a lower February inflation rate of 8.2%. But this figure has been offset with food prices increasing month-on-month which contrasted against the declines in energy costs across the economic bloc.
On top of a small drop in headline inflation, the core figure picked up to an estimated value of 5.6% in February, from 5.3% in January, a small but very noticeable increase.
When combined, this latest batch of economic data further fuels continued discussions that the European Central Bank could keep its firm stance for longer as the dogged approach to tackling inflation looks set to continue over the upcoming months.
The world’s biggest shipping company places its hopes on a rebound for the global economy as world trade continues to return to pre-pandemic levels.
MSC, Mediterranean Shipping Company, the world’s largest ocean freight line, is placing its hopes in more positive signals for the global economy for trade demand, but it will be months before a rebound takes hold.
Over the past several quarters, a large global demand drop and significant supply chain disruptions have influenced the global supply chain and subsequent economic impact has therefore been noticeable.
The Switzerland-based shipping firm, which is widely seen as a barometer for global trade, has a 17.5% market share in container traffic globally and is a key player in the supply chain markets.
Ocean freight bookings are very much dependent on manufacturing orders. U.S. retailers had pulled back manufacturing orders by as much as 40% due to consumer softening and warehouse inventories at historic levels over the course of 2022, which resulted in a drastic drop in shipping levels internationally.
The lack of warehouse capacity is also driving rates to all-time highs, in the form of inflationary pressure that is passed onto the consumer, which is seen in rising inflation rates globally.
Ocean freight rates, which were the largest inflationary pressure on products, have dropped sharply back to pre-pandemic levels.
The combination of the weaker demand and lower prices has led ocean carriers to cancel sailings and by restricting the amount of sailings, shippers shrink the amount of available vessel capacity to put on a container, resulting in further bottlenecks to global trade.
Rejections for ocean freight have also increased, which means containers filled with product for the current or upcoming season are delayed.
This has led to logistics managers speculating that this will create a bottleneck in their supply chain, which could lead to further negative economic impact over the coming months.
In our Market Monday insights, Prosperity Investment Management examines the latest developments across the globe's biggest financial markets - providing you with all the latest information you need to know.
UK in surprise boost after record tax payments in January
The UK government saw a surprise surplus in its finances in the month of January despite substantial spending introduced to help with energy bills and EU payments.
The highest self-assessed income tax receipts since records began in 1999 boosted the UK's coffers. It meant it spent less than it received in tax, leaving a £5.4 billion surplus.
Economists said the figures showed a "mixed picture" with public finances still weaker than this time last year ahead of next month's Budget as Chancellor Jeremy Hunt looks to set out his plans for tax and spending in the upcoming weeks.
Public borrowing in the financial year to date is £30.6 billion less than predicted by the Office for Budget Responsibility (OBR), the government's official forecaster.
Annually in January, the government tends to take more in tax than it spends in other months due to the amount it receives in self-assessed taxes, according to the Office for National Statistics (ONS).
But most economists had predicted borrowing to rise this time, in part due to the large amount the government is spending on supporting households with their energy bills.
In addition, the ONS stated the government had faced "large one-off payments" in January relating to historic customs duties owed to the EU in the wake of Brexit.
However, these costs were largely offset by record self-assessed income tax payments of £21.9 billion in January, which has left the government with a surplus.
German economy shrinks more than expected by 0.4% in fourth quarter of 2022
The German economy shrank by 0.4% in last year's fourth quarter with the latest reports from the National Statistics Office.
The German economy shrank by 0.4 per cent in last year's fourth quarter, the national statistics office said Friday, a sharp downward revision from its initial report that gross domestic product declined by 0.2 per cent.
The quarter-on-quarter contraction in the October-December period was the first since the first quarter of 2021.
Consumer spending, which propped up growth in the first nine months of last year, dropped by 1 per cent in the final three months of 2022.
Investment in construction and machinery showed bigger drops in the final quarter, the Federal Statistical Office said.
The full-year 2022 growth figure for Germany, Europe's biggest economy, remained at the 1.8 per cent that the office reported at the end of January.
The economy has generally held up well, despite pressure from high inflation and fears last year of an energy crunch as Russia reduced and then cut off its gas supplies to Germany.
Cash-strapped Pakistan receives funds worth $700 million from China Development Bank
Pakistan Finance Minister Ishaq Dar has confirmed that the State Bank of Pakistan (SBP) has received USD 700 million from the China Development Bank (CDB).
This comes as a much-needed boost to the country's forex reserves as the country suffers from an economic crisis.
Earlier this month, the country's foreign exchange reserves slipped to the alarming level of below USD 3 billion for the first time in nine years, reducing import capacity to slightly over two weeks, according to The Express Tribune.
Pakistan has sought to secure assurances from Saudi Arabia and China for more loans, as the government seeks to revive the International Monetary Fund (IMF) programme.
The current situation in Pakistan is the most difficult faced by the country in the last two decades.
In December 2022, inflation in the country stood at 24.5 per cent, almost double of 12.3 percent from the previous year.