IFX Market Report: Wednesday 6th September 2023

The recent increase in oil prices has sparked concerns that interest rates may need to remain elevated for an extended period to combat inflation, which could negatively impact economic growth. One economist noted that the market sentiment remains pessimistic, with no apparent positive factors on the horizon. The persistence of high oil prices and renewed worries about inflation are contributing to this downbeat mood.

UK housebuilder Barratt has issued a warning, stating that the challenging conditions are expected to persist in the coming months. They have confirmed plans to reduce their home construction this year. In their annual results, Barratt reported a 3.9% decrease in the number of homes completed compared to the previous year, with pre-tax profits showing a nearly 10% increase to £705 million (though this fell by 16% on an adjusted basis). Barratt anticipates a significant drop in new home construction for the current financial year, with plans to build between 13,250 and 14,250 homes, a substantial decrease from the previous year.

Concerns about the global economy have escalated following disappointing reports on service sector activity in China, the eurozone, and the UK. Asian stock markets declined, and the pound reached a 12-week low against the US dollar due to concerns that China's post-lockdown recovery might be losing momentum. Furthermore, rising interest rates appear to be affecting service sector activity negatively in both the UK and the eurozone.

Revisions of official statistics have revealed that the UK economy rebounded from the Covid-19 pandemic more rapidly than previously believed. New data from the Office for National Statistics showed that by the end of 2021, the UK's gross domestic product (GDP) was actually 0.6% larger than in the final quarter of 2019, before the pandemic hit, as opposed to the previous estimate of a 1.2% decline. This adjustment erased the perception that the UK's economy was lagging in its recovery.

The cooling of the world's largest economy, as indicated by the recent US jobs report, has given the US Federal Reserve the flexibility to maintain steady interest rates. Economists suggest that the Fed may consider resuming a historic monetary tightening campaign later in the year, but for now, they can keep rates stable. Despite a rise in the unemployment rate in August, the addition of 187,000 jobs highlights the resilience of the economy, even as consumers and businesses face higher borrowing costs.

Goldman Sachs is increasingly confident that the US economy will undergo a soft landing, a scenario that was previously considered unlikely. In a recent research report, Goldman Sachs reduced its estimated probability of a US recession over the next 12 months to just 15%, aligning it with the historical average. This is a decrease from their previous forecast of 20% and a significant reduction from their 35% projection in March during the banking crisis.

Paolo Gentiloni, the European Commissioner for Economic Affairs, stated that Europe is currently dealing with a "double crisis" resulting from Russia's full-scale invasion of Ukraine and the subsequent economic repercussions. Despite these challenges, Gentiloni expressed confidence that the region can avoid a recession.

The dollar has strengthened over the past few days and GBPUSD resides at 1.2550 whilst Euro pessimism has seen EURUSD fall to around 1.07. GBPEUR resides at 1.17

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