Booming Britain? Well not quite, but a pleasant surprise nonetheless. UK GDP expanded 0.5% in the month of June, well above consensus expectations. The Office for National Statistics (ONS) attributed the expansion to a recovery in activity following May's extra bank holiday.
This was most noticeable in manufacturing, where output grew by 2.4%, the strongest monthly rise in almost two years. Growth in pharmaceutical output and the manufacture of transport equipment both helped. This means that in Q2 2023 the UK economy expanded by 0.2%, above the Bank of England's most recent forecast of 0.1% growth.
The UK consumer seems to have a split personality; low on confidence but prepared to spend. Problematically for economists, it is difficult to identify a representative UK consumer; consumption patterns represent the amalgamation of myriad situations and choices. So I was interested to come across a new term that headlined last week: Generation Guppies ‘Give Up on owning Property’. According to Zoopla, four out of ten adults aged 18-39 who don’t own a home say they’ve given up on the idea of buying one in the next 10 years. Perhaps, this is a factor in higher leisure spending. Or it may be that the generations that have benefited from house price inflation, both Baby Boomers and Generation X are being helped by higher savings rates – having substantially reduced their mortgage obligations over time and sitting on significant housing equity. Unfortunately, the disjointed nature of government housing policy over decades – whose main thrust has been to prevent any downward move in capital values – has protected the strong, frustrated the young and enriched housing company directors. A sub-optimal outcome I would say.
Back on the data front, US inflation was centrepiece last week. In truth, there was little that was unexpected. The headline Consumer Price Index (CPI) rate rose from 3.0% to 3.2%, whilst the core rate edged down from 4.8% to 4.7%. Investors took these readings pretty well, sensing that the underlying inflation outlook is improving. One feature stopping the CPI data from declining more sharply is housing costs – a lagging element in CPI. With house rental inflation now showing signs of moderation it is expected that the housing component, which is a significant part of CPI, will be on a downward trend through the rest of the year, helping to take headline inflation lower.
Despite signs of moderating price pressures, the US treasury market fell over the week, with the 10-year yield rising to from 4% to above 4.1%. This was a trend seem in major markets. German 10-year rates rose above 2.6% whilst Italian government bonds finished above 4.25%. In the UK, yields were volatile with yields lower for the most part, but seeing a significant reverse on Friday, taking 10-year rates above 4.5%. Over the weekend there seemed to be media articles hinting that, although this week’s inflation data will show a decline, the following month may be more problematic – especially as this sets a reference rate in parts of the public sector.
China remains an outlier, with inflation going negative in July. It has not followed the pattern seen in other economies of an inflation spike as lockdowns end. One clear difference is that China has not seen a surge in food prices – with domestic production coping with demand and cost pressures. In addition, it appears that Chinese manufacturing companies geared up for a global surge in demand for their products that has just not materialised. In consequence, goods price inflation has dropped with more production diverted to domestic consumption.
Investment grade credit markets remained subdued; issuance reflects the seasonal lull whilst credit spreads are broadly unchanged. Demand for higher quality bonds remains strong, with ongoing annuity demand for longer dated debt. High yield markets closed with narrower spreads, although the sell-off in government bonds on Friday may lead to some follow through this week. There was more bad news in the Chinese real estate market with Country Garden, a leading property developer, missing payments on bonds.
Where am I on investment grade credit? Still positive but less so. Whilst ‘all in’ yields look attractive the makeup of that yield has shifted, with the component reflecting government yields higher and the compensation for credit risk moving lower. So, I am still positive on credit relative to government bonds – but to a slightly lower extent.
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