Market Activity


The weekend review- GDP is positive but the FTSE trended down.

Market Activity

The weekend review- GDP is positive but the FTSE trended down.

June 30, 2024

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The UK economy is doing better than you think

The UK economy grew faster than first thought in the first three months of the year, according to data released on Friday by the Office for National Statistics.

Gross domestic product grew by 0.7% in the first quarter, up from an initial estimate of 0.6% growth.

This follows 0.1% and 0.3% contractions in the third and fourth quarters of last year, respectively.

The figures showed that the services sector expanded by 0.8%, up from an initial estimate of 0.7% growth. Meanwhile, production was up 0.6% in the first quarter, down from 0.8% initially estimated.

The construction sector contracted 0.6%.

Paul Dales, chief UK economist at Capital Economics, said the upward revision to Q1 GDP "suggests whoever is Prime Minister this time next week may benefit from the economic recovery being a bit stronger than our already above-consensus forecast".

The FTSE 100 failed to pay much attention to the news and lost all of Friday’s gains by the close to end the week down 0.89%. This happens, but the signs are that the economy is doing well and longer-term outlook is good so we would ignore the short-term trend for now.

The pan-European STOXX 600 Index ended 0.72% lower amid heightened political uncertainty in France as the snap election called by President Emmanuel Macron approaches.

Major stock indexes were mixed. Germany’s DAX rose 0.40%, Italy’s FTSE MIB fell 0.46% and France’s CAC 40 Index lost 2.03%.

Eurozone government bond yields rose ahead of inflation prints in the eurozone and the U.S.

Comments from European Central Bank officials leaning toward a more cautious approach to cutting interest rates this year added upward pressure on yields. The yield spread between French and German debt widened ahead of France’s election, which is scheduled for June 30.

UK yields also climbed ahead of the UK elections on Thursday, July 4.

The rate of inflation eased in two of the eurozone's biggest economies in June, preliminary country data showed on Friday.

Spain’s National Statistics Institute said annual consumer price inflation was 3.4% in June, down from May’s one-year high of 3.6%. It was, however, a little higher than expectations, with most analysts looking for 3.3%.

The fall was driven primarily by slowing food and fuel prices, offsetting an increase in the cost of leisure and cultural services as Spain entered its key summer tourist season.

The core rate, which strips out volatile elements such as energy and food, was unchanged at 3%, while the harmonised index of consumer prices (HICP) fell to 3.5% from 3.8%..

In France, meanwhile, inflation was estimated by the National Institute of Statistics and Economic Studies to be 2.1% in June, compared to May’s 2.3%. HICP eased to 2.5% from 2.6%.

As with Spain, the decline was led by falling food and energy prices and was largely in line with forecasts.

Most major U.S. stock indexes posted gains in a light news week during what seemed to be a bit of a lull in market activity ahead of second-quarter earnings reports. Small-cap companies and information technology stocks performed best, with growth stocks outpacing value.

Index provider FTSE Russell was due to rebalance its series of Russell indexes after the close on Friday, so some of the week’s activity may have stemmed from positioning adjustments by investors tracking those indexes.

On Friday morning, the Bureau of Economic Analysis released May data for the core personal consumption expenditures (PCE) price index, which showed that prices excluding food and energy rose 0.1% from April. Core PCE is the Fed’s preferred measure of inflation, so markets welcomed the deceleration from April’s upwardly revised 0.3% pace as an indication that a September Fed rate cut is more likely.

Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 2.6% and the broader TOPIX Index up 3.1%, as historic weakness in the yen continued to support the country’s export-heavy industries. The Japanese currency hovered around its lowest levels in 38 years, falling to around JPY 160.6 against the USD from JPY 159.7 at the end of the previous week.

On the economic data front, investors focused on the Tokyo-area core consumer price index print for June, which showed that inflation rose 2.1% year on year, more than consensus expectations and accelerating from 1.9% in May.

Chinese stocks weakened as a light economic calendar and concerns about the slowing economy curbed risk appetite. The Shanghai Composite Index and the blue-chip CSI 300 Index both recorded slight declines for the week, while Hong Kong’s benchmark Hang Seng Index slid 1.5%, according to FactSet.

Industrial profits at large companies edged up 0.7% in May from a year earlier, the National Bureau of Statistics reported, down from April’s 4% gain. Analysts attributed the earnings improvement to higher commodity prices, which boosted profits for mining companies.

The Week Ahead

Britain's first election since the pandemic will take centre stage next week, with the Tories expected to lose power for the first time in nearly 15 years.

Taking place on Thursday 4 July, Brits up and down the country will head to polling stations with the first results due in the late evening.

A decisive decision on the winner is expected to be revealed before the markets open on Friday.

Based on the Bank of England’s financial policy report this week, the biggest risk from this election is that the party that wins overspends, which causes bond markets to revolt and bond yields to move higher.

Meanwhile, in company news Sainsbury’s will be leading the charge with its trading update. Rival Tesco provided a strong set of results earlier this month, with the leading supermarket boasting volume and market share growth.

Topps Tiles, vaping group Supreme and Victrex will all also report, supplemented by a range of AGMs from the likes of M&S and JD Sports.

It's possible we'll know who won the first round of France's election by the time markets open in Asia next week, which means the euro and European index futures could be more active than usual.

Marine Le Pen is confident of an outright majority in parliament, which she then intends to use to form a government and hamper President Macron's ability to support Ukraine. This brings an element of geopolitics into the mix alongside ramifications for Europe as a whole.

Despite the public holiday on Thursday, the US economic calendar is also packed. Two key ISM reports for manufacturing and services land before July 4th, alongside JOLTS and ADP employment reports, which are the warm-up acts for NFP on Friday.

The bulk of purchase manager index (PMI) reports are actually the final reports from S&P Global, which tend not to be big market movers, as the real bets were made on the flash reports. But we also have ISM manufacturing and services reports from the US and government reports from China to keep an eye on.

There were higher hopes that last month's incoming NFP data would disappoint and justify sooner Fed action. It didn't. Sure, unemployment rose to 4%, but the 272k headline job growth figure was around 100k higher than expected. And when combined with the uncomfortably firm services PMI print, hopes for a September Fed cut were slashed. We know the Fed is priming markets for a solitary cut in December, so incoming data is really about how soon and how many cuts we get for 2025. Not only do we have ISM PMI reports next week, but a host of employment figures, including NFP, ADP, and JOLTS job openings.

We know the economic data in the US is deteriorating in some parts, albeit slowly. But the faster the cracks in the employment situation widen, the faster the Fed is likely to act. The ideal scenario for those hoping for central bank easing is for job openings to continue trending lower and unemployment to rise to 4.1% or higher, alongside decent misses on the headline NFP and ADP job change figures.

Having said that, a weakening economy isn’t a good thing. While it might speed up interest rate reductions, it is still a weakening economy.

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