Midweek market update: UK GDP and US inflation both flat in April

The UK economy stagnated in April, according to figures released by the Office for National Statistics on Wednesday, having just come out of a recession a month earlier.

GDP was flat, in line with analysts’ expectations, following 0.4% growth in March.

The data showed that output in services grew 0.2% in April, the fourth consecutive monthly growth, and by 0.9% in the three months to April.

Output in production fell 0.9% following 0.2% growth in March but was up 0.7% in the three months to April.

Meanwhile, construction output declined by 1.4% in April – the third consecutive monthly fall – and by 2.2% in the three-month period.

The manufacturing and construction sectors took a hit from wet weather. The ONS said overall rainfall in April was 155% of the long-term average according to the Met Office's Monthly Climate Summary.

Paul Dales, chief UK economist at Capital Economics, said: "Overall, despite the stalling of the recovery in April, the dual drags on economic growth from higher interest rates and higher inflation will continue to fade throughout the year.

Stocks in London closed higher but this was more due to a cooling in US inflation than anything domestic.

The FTSE 100 rose by 0.83%, closing at 8,215.48, while the FTSE 250 saw a more substantial increase of 1.14% finishing the day at 20,497.40.

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In the US

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Underlying US inflation slowed down for a second month in May, a pleasant surprise for Federal Reserve officials looking for signs that they can start to lower interest rates.

The core consumer price index, which excludes food and energy costs, still climbed 0.2% from April, Bureau of Labor Statistics figures showed. The year-over-year measure rose 3.4%, its slowest pace in more than two years, according to data out Wednesday.

The figures, taken with the deceleration in the core CPI in April, may represent the early stages of inflation resuming a downward trend. But policymakers have stressed that they’d need to see several months of price pressures receding before they consider lowering interest rates, especially with the latest jobs report reigniting the debate over how restrictive policy actually is.

Stocks traded higher and Treasuries rallied across the curve, pushing both two-year and 10-year yields down about 14 basis points. Traders fully priced in two rate cuts by the end of the trading day with the first move coming in November, two days after the presidential election.

Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure was flat from the prior month — the tamest in almost twoy ears, dragged down by cheaper gasoline, and 3.3% from a year ago.

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In oil

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Oil pared gains to trade near $78 a barrel after US government data showed an unexpected increase in the country’s crude stockpiles, blunting an earlier rally driven by cooling inflation pressures.

US oil and gasoline inventories unexpectedly rose, a bearish signal that markets remain amply supplied. West Texas Intermediate traded little changed after earlier climbing as much as 1.8%.

Brent Crude was also up 1% on the day closing close to $83 a barrel.

Prices have rebounded from last week’s post-OPEC+ selloff, a sign that the biggest pullback in speculative bullish bets on record may be at least partially reversing. Goldman Sachs GroupInc. said earlier this week that financial demand for oil contracts still had a lot of room to recover.

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Any other business?

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European natural gas settled at the highest in more than a week following an international arbitration ruling that adds uncertainty over remaining fuel flows from Russia.

German’s Uniper SE was awarded more than €13 billion in damages for gas volumes not supplied by Russia’s Gazprom PJSC. While Uniper hasn’t received gas from Russia since 2022 other states in Europe continue to rely on deliveries from the country. Austria’s OMV AG warned recently that court rulings risk disrupting supplies.

Benchmark futures closed 2.9% higher at €35.29 a megawatt-hour, the highest since June 3.

Rising oil and gas prices are not good for the fight against inflation. The numbers seem to have cooled for the time being, but this course will need to continue before the Fed are comfortable.

We do expect the Bank of England to cut first in the coming months.

More from us on Sunday with our weekly review.

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