6th June 2023

Market Report-Hargreaves Lansdown

Susannah Streeter, Head of money and markets, Hargreaves Lansdown, comments:

"The week’s early optimism has been clouded by renewed concerns about a looming recession in the America, while the repercussions of the banking crisis appear to be coming back to bite big US lenders.

As the world’s largest economy shows more signs of heading for a contraction, with growth in the mighty services sector slowing more quickly than expected last month, worries are rising about the knock-on effect around the world. It’s helped erase crude oil gains, with the effects of Saudi Arabia’s production cut drowned out in the noise about slowing demand. With oil prices ticking back down after Monday’s jump, it will bring relief to millions of Americans who have their eyes trained firmly on the fuel gauge as driving season gets underway and they fill up and head across the vast country for vacations.

While signs of further slowing in activity is not great news for the US economy overall, it’s music to the ears of Fed policymakers who are anxious for signs that inflation is responding to monetary tightening. The the ISM Services PMI reading, showing a slowdown in growth in May is another nugget of data to add to the growing weight of evidence that interest rate rises are having the desired effect, and bets are rising that the Fed will press pause next week. But it’s going to keep its powder dry and another rate hike could still come this summer.

While higher interest rates have helped boost big banks’ net interest margins, the rapid tightening set off a fire in the US regional banking system which is still smouldering. Regulators appear to be mulling whether to enforce much stricter capital rules on lenders, increasing average requirements by as much as 20%, as part of new standards set out by the Basel committee on banking supervision which sets global targets. The prospects of that more onerous requirement has sent US banking shares lower. While the higher limit may not come to pass for all lenders, it’s clear regulators are still worried about fragilities in the system and want banks to plump up safety cushions to stop further fractures emerging.

There is mounting evidence that consumers in the UK are feeling the pain of the cost-of-living crisis more acutely and are cutting back on discretionary purchases. Scorching food and mortgage costs are burning shoppers spending power and credit card spending has slowed markedly as a result. Barclays report indicates we are buying fewer goods we’d like rather than we need, with money diverted into paying for more expensive food, with growth in grocery spending rising at the fastest pace in two years(8.9%). However, we still appear to be ring-fencing any available cash for experiences and holidays. Spending on airlines increased by more than a third(34.4%) as 13% say they have set money aside to enjoy a trip overseas, an indication that pent-up demand for holidays post-pandemic hasn’t waned.

The CBI is facing a day of reckoning today just as a new competitor waits in the wings, keen to get the ear of government. The business lobby group, mired in scandal over allegations of assault against employees, has planned a root and branch reform and a new vision for the future which its members vote for today. Just how it will emerge from the crisis is far from clear, but demonstrating its relevance is going to be an even harder challenge given that the British Chambers of Commerce could steal a march on its efforts after it launched its own high-level lobby group-The Business Council. Big corporate names have already been deserting the CBI and may run into the arms of a new body, untainted by controversy. The new Director General Rain Newton Smith will have to be highly skilled in the art of persuasion to keep the organisation alive and has had some success with Siemens, Microsoft and Esso pledging ongoing support. But with the new rival group also winning backing from large companies, a further fracturing of lobby group landscape lies ahead."

Hargreaves Lansdown Trends(154 articles)