Economic Highlights

The latest Money Supply data revealed little change in activity in the economy. Mortgage Approvals in May fell back from 60,821 to 59,991, reflecting the back up in mortgage rates this year. The effective interest rate on all mortgages continues to creep up (to a current 4.79%) as fixed-price mortgages mature and need to be refinanced, while new buyers have to grin and bear it. An interest rate cut from the Bank of England might be needed to boost the housing market again. Although the Labour Party has an aspiration to have 300,000 new homes built per annum in the UK, it’s not clear that there are enough skilled tradespeople to build them (especially if immigration is controlled), nor that Labour’s plans to ease the planning regime will bear fruity quickly.

The headline Non-Farm Payroll increase of 206k in June beat the consensus forecast of 190k, which, on the face of it, suggests a firm labour market. However, more weight was placed on the downward revisions to the previous two months’ figures by a cumulative 111k, much more than the positive headline surprise. The other weak element of the report was the Unemployment rate, which ticked up to 4.1%. This is taken from a separate survey of households and is currently being viewed with some scepticism by many economists. The Atlanta Fed’s US GDPNow forecast for Q2 fell from 2.24% to 1.54%. The Citigroup Economic Surprise Index fell from -28 to -46, the lowest level since mid-2022. It still seems to be more a case of pricing out a strong economy than pricing in a recession, but the downward momentum is a bit of concern.

The latest inflation data for the eurozone was slightly disappointing. The annual core inflation rate stuck at 2.9% against an expected fall to 2.8%, still up from March’s recent low of 2.7%. This helps to explain the European Central Bank’s reluctance to push on with interest rate cuts after its initial 0.25% reduction in June. There is a lot of talk about the “last mile” of getting inflation down from 3% to 2% (which remains central banks’ target) being difficult, so it is proving. Although we continue to believe the falling trend is in place.

Japanese workers’ base salaries jumped the most since 1993, an encouraging sign that the underlying pay trend may start to support consumption and enable the Bank of Japan to raise interest rates again. Base pay increased 2.5% in May from a year ago, outpacing the 1.9% gain in the headline figure. Separately, the Bank of Japan said wage increases were broadening across the economy owing to tight labour market conditions, signalling its confidence that the country was making progress toward durably achieving its 2% inflation target (and Japan is trying to get inflation UP to 2%, unlike what is happening in most other developed market economies).