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Market commentary

Over June and early July, the main market theme was a global sell-off in bonds, driven by a run up in rate expectations.

11th August 2023


Consumer Prices Inflation (CPI) fell more than expected in June to 7.9%, providing welcome relief after four reports suggested inflation would be higher than expected.

Falling fuel prices were a significant drag on the headline CPI measure, but there were also encouraging signs from core inflation, which excludes food and energy prices and is an indicator of longer-term inflation.  After the annual core inflation rate unexpectedly rose in May, there was a dip down in June to 6.9% from 7.1%.

Inflation levels are now back on the path projected by the Bank of England in May with significant downward pressures on inflation still in the pipeline -especially in the next report when the July Energy Price cap hike will fall out of the annual calculation.


Inflation in Europe as measured by CPI fell from 5.5% to 5.3% but there were concerns that core inflation remained unchanged at 5.5%.

The European Central Bank is still talking about more interest rate increases to come in its fight against inflation. A revision to growth data means that the eurozone did not enter a recession in the first quarter of this year reinforces this view.


CPI inflation in the US fell in June to a 27-month low of 3%.

Consumer spending remains high, and it is thought a likely reason is that many households still have ‘excess’ savings built up during the Covid pandemic with estimates that this may still be over $1 trillion. Consumer spending could support the economy for a while longer and reinforces the federal reserve’s insistence that interest rates may continue to rise and may not fall as soon as people think.

Emerging markets

China continues to dominate the Emerging Markets narrative, and for all the wrong reasons. The post-lockdown recovery has failed to gain any real traction. While global demand for goods is weak, hampering the export economy, domestic consumption is also lacklustre. This is largely being blamed on the housing market, where prices are flat. Many of China’s citizens have ploughed their savings into residential property as a substitute for a pension, but with house prices not moving, they have been disappointed with returns.

One factor in China’s favour, is that it is the one country in the world where inflation is not a problem. Economic commentators are expecting some form of stimulus from the Government to boost confidence. With youth unemployment running north of 20%, the Government will be motivated to act at some point owing to the risk of social unrest.

Defensive assets

Inflation has proved more resilient to date than perhaps has been forecast at times this year. This has fed into the prospects for interest rate rises and nowhere was this more evident than in the UK as the lack of a fall in inflation in the May report caused a spike in the expectations of UK interest rates as high as 6.75% and headlines reporting 2-year gilt yields surpassed the post ‘mini’-Budget peak.

However multi-year highs in yields were not limited to the UK. Despite inflation falling significantly, 2yr US Treasury yields for example breached 5%, levels not seen since 2007. The federal reserve has continued to publicly suggest interest rates may not have peaked and while there was a pause in interest rate rises in June there was a further 0.25% hike in the US base rate to a range of 5.25%-5.50% on Wednesday 26 July.

With higher interest rate expectations we have seen further pressure on our bond allocations. The longer duration index linked gilt fund has seen further falls. The shorter dated high quality Dimensional Short Dated Bond fund on the other hand has been far more stable and currently yields 5.58%.

Please speak to your financial planner if you want to discuss your portfolio.