Client Update - 3rd March 2023

Here we go again - good news is actually bad news. Markets can be very frustrating. Better than expected growth data, robust employment and confident management surveys would suggest a healthier than expected global economy. The only slight wrinkle is that central banks may well perceive this as inflationary and therefore view that further work is required to raise interest rates to combat these inflationary pressures.

Markets have been driven by the interest rate outlook once more. Futures markets this week indicated the US Federal Reserve’s main policy rate will peak at about 5.5% in September, up from the current range of 4.5-4.75%. Expectations have changed quite a bit over the last few weeks after releases of hotter than expected US economic data and stickier inflation. Investors at the start of February anticipated rates would peak at just under 5 per cent in the second quarter.

An expectation of higher interest rates for longer in the US has led to a strengthening once more in the US Dollar and a weakening in Emerging Market equities. Investor concerns that global central banks would be forced to keep interest rates higher were heightened by stronger than expected inflation data from Germany, the eurozone’s biggest economy. German consumer prices rose 9.3% year on year in February, versus forecasts of 9.1%, echoing similar unexpected increases in Spanish and French data earlier in the week. This was then mirrored by mainstream Eurozone inflation that dipped slightly to 8.5%, but remained well above economists’ expectations of 8.2%.

There was better news from Asian stocks, which rallied strongly on Wednesday as robust Chinese manufacturing data lifted investor spirits and the news in that region was not tempered by its own grumpy central bank. Hong Kong’s Hang Seng index closed up 4.2%. The figures showed that China’s manufacturing sector expanded at its fastest pace in more than a decade, in an unambiguous signal that its economy was rebounding after the government’s strict zero-Covid policy was lifted. According to China’s National Bureau of Statistics, the official manufacturing sector purchasing managers’ index was 52.6 last month, up from January’s 50.1 and higher than economists’ expectations of 50.5. The reading was at its highest level since April 2012. A figure of more than 50 on the index, which surveys companies about their activity, indicates an expansion, while one below signals a contraction. The data is an indication of recovery across China’s economy, which grew just 3% last year under President Xi Jinping’s zero-Covid policy and a wave of infections in big cities. Beijing’s decision to abruptly unravel the restrictions has spurred a resumption of activity.

So in China, good news is actually good news. I hope you are keeping up!

More pressing for readers of our weekly email may well be the continued lack of fruit and veg on our shelves. Despite being assured this week that Spain’s fruit and vegetable exports to the UK have suffered “no fundamental disruption” from Brexit, we still see shortages in British supermarkets and added costs for exporters. Spain’s agriculture minister echoed the UK government’s explanation. Luis Planas said a lack of cucumbers, lettuces and tomatoes in stores partly reflected frosty temperatures in southern Spain, which had slowed production in recent weeks. But he told the Financial Times the shortage was “an anomaly not a trend”. Planas acknowledged that smaller-scale producers of wine, cheese and olive oil have had a particularly hard time accepting higher costs and are shipping less regularly to the UK. I do hope you enjoy your weekend, with or without your favourite fruit and veg to indulge in.