Market snapshot: a perky end to the first half of 2023

Positive data has been a driver of sentiment in recent weeks, and another potentially market moving event is looming. Our head of markets talks through the numbers that matter.

Markets rose as investors took comfort from the success of the bank stress tests, while further economic strength was in evidence from a brace of reports.

US GDP for the first quarter was confirmed at 2%, ahead of the expected 1.4%, and was bolstered by robust consumer expenditure. Exports were also notably higher despite the strength of the dollar, rising by 7.8% after a decline of 3.7% in the previous quarter.

In a separate report, initial jobless claims fell to 239,000 from 265,000 the previous week and below estimates, implying an improvement in the labour market. As such, next week’s non-farm payrolls report will immediately assume extra significance.

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The ongoing strength of economic data, which adds to the likes of consumer confidence and new home sales earlier in the week, underpins evidence that the US economy is hardy enough to withstand the expected one or two further interest rate rises this year without derailing growth. The likelihood of a hike of 0.25% in July is now almost fully priced in, while the possibility of a soft landing for the economy is becoming an increasingly popular view.

The next show of evidence will come today with the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures report. The consensus is for an increase of 0.3% in core inflation, which would compare with a rise of 0.4% in April and which would annualise to a figure of 4.7%. Such a result would cement the Fed’s determination to bring the figure lower with more rate increases, but the market has clearly been taking solace that the effect will be limited given the current health of the economy.

The strength of the banks during the annual stress test, which plots a parlous scenario to estimate the banks’ ability to cope, is of significant relief to the strength of the system and also its stability following the more recent banking turmoil. With the half-year reporting season now imminent, thoughts will turn to how companies generally fared amid such a turbulent time and whether their guidance will have been altered as a result.

Moving into the last day of trading for both the quarter and the half-year, markets have shown some resilience amid the challenges, with the performance of big tech being the stand-out performer. In the year to date, the Dow Jones has risen by 3%, while there have been rather more striking performances from the S&P500 and the Nasdaq, which have risen by 14.5% and 30% respectively.

Asian markets were also broadly positive, with weak economic data from China heightening expectations for further stimulus from the authorities. Factory activity dropped for a third straight month in June, while there were also signs of additional fatigue in other sectors. The weakness of the Japanese yen also prompted questions as to whether the central bank would hold firm with its loose monetary policy, or whether some tightening would become necessary given both the weakness of the currency and marginally higher inflation expectations.

UK markets opened ahead, despite a GDP release which confirmed the frailty of the domestic economy. Marginal growth for the first quarter of 0.1% was confirmed, but the unfortunate fact is that the game has changed over subsequent months.

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As cost-of-living pressures intensify, and with the Bank of England continuing its rate hiking policy in an effort to tame inflation, there is little room for manoeuvre without tipping the UK towards recessionary territory. Such concerns have been reflected in the weakness of the FTSE250 of late, with the unofficial domestic barometer now having lost over 3% so far this year.

Some tentative bargain hunting among the beleaguered bank and property stocks lifted the premier index in opening trade, with the ongoing strength of the US economy providing an indirect benefit due to the preponderance of overseas earnings stocks among its constituents. The rise was measured rather than ardent, though, given the change of investor attention to other growth areas and leaves the FTSE100 ahead by just 0.6% in the year to date.