UK Economy Bounces Back

CAPTA WEALTH on 2024-05-13

In the US, initial filings for unemployment benefits have surged to their highest level since late August 2023, suggesting a potential shift in what has otherwise been a robust labour market. According to the Labor Department's report on Thursday, jobless claims totalled a seasonally adjusted 231,000 for the week ending on May 4, marking a significant increase of 22,000 from the previous period. This figure represents the highest number of claims since August 26, 2023. The surprising rise in jobless claims appeared to dominate the week's sparse economic calendar.

The S&P 500 Index edged closer to its all-time high, marking its third consecutive week of gains as it closed the week with a notable increase of 1.85%. Other major indexes also saw advancements, with the Dow Jones surging by 2.16% and the Nasdaq rising by 1.14%.

Britain's economy saw its most robust growth in nearly three years during the first quarter of 2024, marking the end of the shallow recession that commenced in the latter half of last year. According to data released by the Office for National Statistics (ONS) on Friday, Gross Domestic Product (GDP) expanded by 0.6% in the first three months of the year. This growth represents the strongest performance since the fourth quarter of 2021 when GDP increased by 1.5%. Notably, this growth comes after contractions of 0.3% in the fourth quarter and 0.1% in the third quarter of the prior year. Typically, a recession is defined as two consecutive quarters of economic contraction.

The Bank of England maintained its key interest rate at a 16-year peak but hinted at potential rate cuts in line with European peers. In its Thursday meeting, the central bank upheld the key rate at 5.25%, as expected, marking the sixth consecutive meeting without change. The Monetary Policy Committee (MPC) voted 7-2 in favour of holding rates steady, with the minority advocating for a cut. Despite this stance, the MPC remains cautious, citing elevated indicators of inflation persistence, particularly with services inflation reaching 6% in March, and acknowledging "upside risks" from geopolitical tensions. The central bank committed to monitoring forthcoming economic data releases to gauge the diminishing risks from inflation persistence before its next meeting on June 20.

The pan-European STOXX Europe 50 Index closed 3.32% higher, driven by better-than-expected corporate earnings and growing optimism regarding imminent interest rate cuts by major central banks. Similarly, the UK’s FTSE 100 Index surged sharply, climbing by 2.68% to reach a new record high.

The Caixin/S&P Global services purchasing managers' index (PMI) saw a modest dip from 52.7 in March to 52.5 in April, yet it remained in expansion territory for the 16th consecutive month, in line with market expectations. The 50-point mark separates expansion from contraction. The recent private sector survey indicated a modest slowdown in China's services sector expansion, primarily attributed to rising costs. However, amidst this, there was a notable acceleration in the growth of new orders, complemented by a solid uptick in business sentiment. 

In April, China's exports registered a notable rebound, increasing by 1.5% year-on-year, a significant improvement from the 7.5% decline witnessed in March. Notably, exports to Southeast Asian nations strengthened, while shipments to Europe saw a decrease. Sales to the U.S. remained relatively unchanged. Meanwhile, imports exceeded expectations, rising by 8.4% in April, reversing the 1.9% decline seen in March. Some analysts attribute this increase to heightened shipments of raw materials rather than a surge in consumer demand. Consequently, China's overall trade surplus expanded to USD 72.35 billion in April, up from USD 58.55 billion in March.

As optimism surrounding economic recovery increased, Chinese stocks gained momentum, driven by robust holiday spending during the previous week's Labor Day holiday. The Shanghai Composite Index surged by 1.6%, while in Hong Kong, the benchmark Hang Seng Index climbed by 2.77%.

Last week, Bank of Japan Governor Kazuo Ueda's commentary triggered a surge in yen-selling, as he suggested that yen weakness might not exert a significant influence on inflation or monetary policy. However, he reversed course this week, indicating that if upside price risks escalate, it would be prudent to expedite rate hikes. Furthermore, he underscored the adverse impact of the yen's persistent weakness on Japan's economic landscape. Ueda emphasized the BOJ's vigilant monitoring of the currency's depreciation while assessing the necessity for monetary policy adjustments. Consequently, in contrast to global peers, Japan's Nikkei 225 Index registered marginal weekly losses of 0.02%.

Market Moves of the Week

Manufacturing output in South Africa has significantly underperformed market expectations, posing potential challenges for the forthcoming GDP figures for Q1 2024. In March, manufacturing production contracted notably by 6.4% year-on-year, following a revised 4.0% increase in February. Key sectors contributing to this downturn include motor vehicles, parts, accessories, and other transport equipment, as well as basic iron and steel. Despite this setback, South Africa's economy is not at immediate risk of entering a technical recession (two consecutive quarters of contractions in GDP), as GDP saw a marginal quarter-on-quarter growth of 0.1% in Q4 2023.

On Friday, the JSE All-Share recorded its most significant gain in 10 days, rallying alongside global peers as a softer US jobs report reignited investor expectations of potential interest rate cuts by the Federal Reserve. Throughout the week, the JSE All-Share Index witnessed a notable increase of 2.66%, with significant gains observed across three major sectors, including the resource sector (5.32%), the financial sector (2.42%), and the industrial sector (1.29%). The property sector also saw weekly gains, albeit not as substantial, with an increase of 0.69%. By the end of trading on Friday, the rand strengthened against the U.S. Dollar, trading at R18.44, representing a weekly appreciation of +0.29%.

Chart of the Week:

The UK sees the strongest growth in nearly three years, exiting recession. GDP expands by 0.6% in Q1 2024, its fastest rate since Q4 2022, after a shallow recession in H2 2023. The Bank of England, which held interest rates at a 16-year high on Thursday, anticipates modest growth of 0.4% in Q1 and 0.2% in Q2, with a projected 0.5% expansion for the entirety of 2024. Source: LSEG Datastream 

Credits: Strategic IQ

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