Economic Highlights

There was some easing of labour market pressure in February 2023, with the Unemployment rate creeping up to 3.8% and the participation rate up to 78.9% from the low of 78.3%. However, wage growth was higher than expected, coming in at 6.6% on an ex-bonus basis, the same as in January. Public sector wage growth continues to lag, leading to fears of ongoing strikes. Higher inflationary pressures were also visible in March’s CPI data, with the headline figure remaining in double digits at 10.1% (versus 9.8% expected). The ‘core’ rate was also higher than forecasts and stayed at 6.2%. A welcome fall in motor fuel prices (-5.9% from last March) was more than offset by higher food prices, with the rate rising to 19.1%, the highest in more than 45 years. In response, futures markets saw peak base rate expectations rise from 4.69% to 4.88%, and we can now almost certainly expect the next 0.25% increase from the Bank of England at its meeting on 11 May, taking the rate to 4.50%, a rate last seen in October 2008, just before the financial crisis-induced plunge to near-zero.

The latest S&P Global PMI survey reversed a trend of generally weaker-than-expected data earlier in the week. The Composite reading came in at an expansionary 53.5 (versus 51.2 forecast), driven by both Services and Manufacturing. The latter popped back into marginally positive territory with a reading of 50.4 against an expected 49.0. It seems that prices paid also reflected the higher demand, rising by the greatest amount since last September. That’s a factor that might keep upward pressure on rates expectations. Before then, Existing Home Sales, Mortgage Applications, Weekly Initial Jobless Claims, the Philadelphia Fed Business Outlook Survey and Building Permits had all undershot consensus forecasts. Citigroup’s Economic Surprise Index peaked at 62.5 at the end of March and has since fallen back to 32.1. Even so, rates futures markets indicate a 90% probability of another 0.25% increase in the Fed Funds rate to be announced next week.

The PMI series in Europe was a bit more of a mixed bag. Although the Composite score of 54.4 was ahead of the expected 53.7 (which was the same as in March), it was all driven by a big beat in Services (56.6 versus 54.5 forecast), while Manufacturing fell short of expectations at just 45.5 (48.0 forecast). This was very similar to the outcome in the UK. The final reading for the March CPI was unchanged at 6.9%. Rhetoric from European Central Bank council members continues to suggest more rate increases to come, with the prospect of a 0.50% increase at May’s meeting not off the table, and seemingly inevitable by June. The European Central Bank (ECB) deposit rate is currently 3% (remember it was -0.5% a year ago), and futures markets are pricing in a peak rate of 3.75%. This will mean that the ECB is tightening policy faster than other central banks, a factor which should continue to provide support for the euro.

China’s Q1 GDP figures were the first since the end of the government’s zero covid policy and pointed to a swift rebound in activity. On a quarter-on-quarter basis, GDP rose by 2.2%, following the upwardly revised 0.6% in Q4 2022 (prior: 0.0%). On an annual basis GDP grew by 4.5%, beating the consensus for a 4.0% rise. Monthly data for March was published at the same time and provided further signs that the Chinese consumer was back spending following the end of social restrictions. Retail Sales growth strengthened to 10.6% year-on-year (albeit from a lower base) from the 3.5% seen in February. This was ahead of consensus, which was for a reading of 7.4%. The rest of the data was a little more mixed. Industrial output rose by 3.9% year-on-year against consensus of 4.0% and investment growth was recorded at 5.1% (year-to-date, year-on-year) versus expectations of 5.7%. In broad terms, the data point to a revival of the Chinese economy, helping to support Investec Economics’ view that it will will grow by 5.2% in 2023 as a whole.