There has been a variation in the economic data from the US, eurozone and China, while oil prices have been affected by production changes and maintenance delays. And due to fluctuating markets monetary policy makers continue struggling maintaining consistency.
Beyond the peak
Economic data moderated over the second quarter, even as labour markets have remained resilient. While the broader trends, such as weaker manufacturing activity relative to services, have held, the prognosis for regional growth is more nuanced. Economic data from the United States (US), while slowing, has remained constructive, with the US consumer in particular proving resilient. In the first quarter US gross domestic product (GDP) growth was revised higher to 2,0%, annualised. European data is showing more strain, with Eurozone GDP revised lower, to -0,1% over the first quarter, confirming a technical recession for the region. The United Kingdom (UK) in turn managed a mere 0,1% over the same period. Chinese economic data still point to a weak economic recovery, although policymakers have slowly started to respond with some easing.
OPEC+'s announcement of production cuts of one million barrels a day, from July, supported the oil price over the month. Against that, a cooling global economy and increase in US oil inventories ultimately saw the oil price decline by 6,1% over the quarter, leaving it 34,8% lower over the past 12 months. European natural gas prices, which have declined by around 52% this year, gained 35,6% in June as delays in maintenance at one of the larger Norwegian plants and the early closure of the Groningen gas field in the Netherlands caused some concern. Despite gas storage remaining above historic averages, the price action served as a reminder that the balance between demand and supply can be disrupted by various externalities.
US policymakers agreed to lift the US debt ceiling for the next two years, subject to the compromise of government expenditure cuts. While this implies some fiscal restraint, the trade-off was still more palatable to investors than the possibility of default with all its related repercussions.
A high level of data dependence means that monetary policymakers continue to face the challenge of being consistent but also responsive. After a brief pause, which acknowledged the peak of the headline inflation trajectory, the Bank of Canada and Australia’s central bank both increased policy rates again. This drove the narrative that the US Federal Reserve (Fed) may also 'skip' an interest rate hike or two before continuing on course to higher rates. The US Fed did not disappoint, keeping interest rates on hold, with the median forecasts for policy rates, however, indicating at least two more hikes to come. The European Central Bank (ECB) increased policy rates by 25 bps, while the Bank of England (BoE) surprised with a 50 bps hike on the back of more persistent pricing pressure in the country. The yearly ECB conference in Sintra, Portugal, delivered cautious tones from central bankers. While headline inflation has started to moderate, higher rates will likely be required for still-elevated levels of inflation (especially core inflation) and the path beyond peak inflation remains highly data-dependent.
The performance of risk assets year to date (ytd) belies concerns of weaker global economic growth and tight monetary conditions. Developed market equities outperformed those in emerging markets, with notable returns from the US, Japan and Europe. The S&P 500 gained 8,7% over the quarter, while the Nasdaq 100 benefited from the rally in technology stocks, gaining 15,4% over the quarter and 39,4% ytd. Apple reached a historic $3trn market capitalisation, the first company to do so. Returns were more subdued for markets, assets and commodities that are exposed to the anticipated economic recovery in China, which has lacked momentum. The MSCI Emerging Markets index gained 1,0% over the quarter while the Hang Seng lost 5,9%.
Fortunes were more mixed for fixed-income assets, as markets digested the prospect of higher interest rates. Within the fixed-income universe, US and European high‑yield debt delivered strong relative performance, while UK gilts underperformed other sovereign debt. After a constructive start to the year, the Bloomberg Global Aggregate Bond index declined by 1,5% over the second quarter, leaving the index up 1,4% ytd. The US dollar depreciated by 1,4% on a trade-weighted basis in June, leaving the greenback stronger over the quarter but weaker by 0,6% ytd. While the outcome for markets in 2023 thus far has been better than many feared, several factors, including tighter financial conditions, are still working its way through the system.
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