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September 2023 | Market update

Markets recover after a difficult start to the month

With US inflation ticking up for the first time in a year, Federal Reserve Chair Jerome Powell has not ruled out further interest rate hikes.

US share and bond prices dipped after inflation ticked up, though they recovered as the month drew on. Despite a sharp increase in interest rates, prices continue to rise in the US, with inflation edging up to 3.2% in July from 3% the previous month. More importantly, the core inflation rate – which strips out volatile food and energy prices – slowed to 4.7% in July from 4.8% in June after a second straight monthly drop in the prices of used cars and trucks.

Still-high inflation has heightened concerns that the world’s largest economy may have to keep interest rates higher for longer. Meanwhile, US Federal Reserve Chair Jerome Powell has not ruled out further rate hikes to lower inflation. Even though interest rates and inflation are high, the US economy remains robust, with employers adding 187,000 jobs in July. The unemployment rate fell to 3.5% in July, down from 3.6% in June. Wages also increased, with average hourly earnings climbing 0.4%.

UK inflation dips and euro area returns to growth

The UK’s inflation rate dropped to 6.8% in July, down from 7.9% in June, reflecting falling energy prices. However, core inflation remained at 6.9% in July, maintaining pressure on the Bank of England to keep interest rates high. UK basic wages hit a new record growth rate, with average pay, excluding bonuses, rising 7.8% in the three months through June compared with a year ago.

Average UK house price growth slowed in June, amid signs the property is continuing to cool while mortgage rates remain elevated. House prices rose by 1.7%, down from 1.8% in May, according to the Office for National Statistics. The economy also bounced back in June, growing 0.5% after a 0.1% decline in May when output was depressed by the extra bank holiday for the coronation.

Euro area inflation remained steady in August, while new growth figures show the economy picked up in the second quarter of the year – although economists still fear a recession could be on the cards. Headline inflation in the region stayed at 5.3% in August – higher than expected. The euro area also saw modest growth of 0.3% in the second quarter of the year, but the outlook remains relatively weak. Rising interest rates, a sluggish economy and the end of pandemic aid are straining some European companies. The number of businesses filing for bankruptcy in the months to the end of June increased 8.4% from the previous quarter, the highest since 2015.

China’s economy continues to slow

European and Asian stocks slipped in July as fears over China’s slowing economy grew. The recovery in the world’s second-largest economy is losing steam in the wake of a property slump, weak consumer spending and tumbling credit growth. China’s imports and exports fell much faster than expected in July, threatening growth prospects. The economy has also fallen into deflation after consumer prices fell for the first time since early 2021. In a bid to prop up the country’s struggling property sector and faltering economy, China has cut its benchmark lending rate.

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