Overview
We saw interest rates rise in both the UK and Europe, meanwhile, the US and Japan kept interest rates unchanged during its June meeting as inflation eases. The inflation data remains a dominant point of attention for the markets as it attempts to figure out how much higher rates are likely to go. The central banks are working hard to achieve what is called a policy trilemma: low and stable inflation, robust growth, and ensuring financial stability. However, many macro analysts view that the central banks are heading towards sacrificing one of them, either low growth or a threat to the financial stability, to achieve their long-term 2% inflation target. One of the challenges facing central bankers is avoiding stagflation, where an economy is characterised by high inflation and stagnant growth.
Rising rates adversely impact financial markets, especially fixed income as their prices and yields move in opposite directions. Therefore, DJ Sukuk Index was marginally down in June while modestly up on YoY basis. Among equity markets, DJ Islamic market index was best performer in equity indices listed in the Market Snapshot below, which surged by staggering 5.63% in June while Japan’ Nikkei 225 was the second-best performing equity market index, which rose 4.61% in the same period. The US broad equity benchmark S&P 500 increased just over 4% while UK’s FTSE 100 index returned only 1.2% in the said period, however, China’s Shanghai Index remained largely flat. On the other hand, DJ Commodity Index soared 2.5% while Crude oil and gold both declined by 2.3% and 2.4%, respectively.
Market Snapshot
News & Key Events in June
UK
• The Bank of England raised its policy interest rate by 50 basis points to 5% during its June meeting, marking the 13th consecutive hike.
• The consumer price inflation in the UK held steady at 8.7% in May 2023, unchanged from the previous month’s 13-month low.
• The British economy expanded 0.1% on quarter in the first three months of 2023, the same as in Q4 2022.
US
• The Fed left the target for the funds rate unchanged at 5%-5.25% in June but signalled rates may go to 5.6% by year-end if the economy and inflation do not slow down more. After the FOMC decision, Fed Chair has reinforced several times the need to raise rates further this year. At the ECB Forum, Powell said he wouldn’t take consecutive-meeting rate hikes off the table.
• The consumer price inflation in the US declined to 4% in May 2023, the lowest since March 2021 and slightly below market expectations of 4.1%, driven by a decline in energy prices.
• The US economy grew by an annualised 2% on quarter in Q1 2023, well above 1.3% in the second estimate, and forecasts of 1.4%
Europe
• In June, the ECB raised interest rates by another 25bps, bringing the rate on main refinancing operations to 4%, the highest level since the 2008 financial crisis, and the rate on the deposit facility to a 22-year high of 3.5%. Also, President Lagarde stated that the ECB had more ground to cover and would likely continue raising rates in July.
• The consumer price inflation rate in the Euro Area decreased to 5.5% in June 2023, down from 6.1% in the previous month.
• Germany’s consumer price inflation increased to 6.4% year-on-year in June 2023, rising from the 14-month low of 6.1% recorded in May.
China
• The People’s Bank of China (PBoC) slashed two key lending rates for the first time since August 2022 at the June fixing, as authorities seek to prop up growth. The one-year loan prime rate (LPR), which is the medium-term lending facility used for corporate and household loans, was lowered by 10bps to 3.55%; while the five-year rate, a reference for mortgages, was trimmed by the same margin to 4.2%.
• China’s annual inflation rate edged up to 0.2% in May 2023 from April’s 26-month low of 0.1%.
Others
• The Bank of Japan kept its key short-term interest rate unchanged at -0.1% and that of 10-year bond yields at around 0% in its June meeting by unanimous vote.
• The annual inflation rate in Japan unexpectedly declined to 3.2% in May 2023 from April’s 3-month high of 3.5%.
• The Central Bank of Russia held its key interest rate unchanged at 7.5% for the sixth consecutive decision in its June 2023 meeting, in line with market expectations, but flagged a higher possibility of rate hikes in the upcoming meetings due to higher inflationary risks.
• The annual inflation rate in Russia rose to 2.5% in May 2023 from 2.3% in April.
• The Bank of Canada unexpectedly raised the target for its overnight rate by 25bps to 4.75% in June 2023.
Disclaimer
Data as of 30 June 2023. This article is for information only. Please do not act based on anything you might read in this article. Past performance is not a reliable indicator of current or future returns. This article contains general information only and does not consider individual objectives, taxation position or financial needs. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy to any person in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it would be unlawful to market such an offer or solicitation.
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