Market Activity


This week in review: Inflation is still 'sticky'

Market Activity

This week in review: Inflation is still 'sticky'

June 2, 2024

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Month-over-month PCE Price Index

In the US they manage to see every data release as good news; maybe they’re just built that way. But this monthly chart is starting to suggest that the drop in inflation in October and November were the outliers, not the recent surge since.

We can tell you what will happen next by looking at the previous numbers that fall of the annual figure which everyone seems to think is so important. Next month it will drop a bit, then in August and September when the high readings of 0.4% drop off, the country and its leaders will announce they have beaten inflation.

Chairman Powell will know better than this as come October and November, when the 0.1% readings drop off, inflation will climb and if he lowers rates before then, the world will say that is why. However, all of this is possible with the actual monthly reading simply remaining the same!

Sometimes, things don’t need to be dramatic. Take interest rates for example. The world doesn’t seem to have fallen apart with higher rates. Maybe they aren’t as important as economists would have us believe. Rates will start to fall soon and hopefully it will be before any cracks emerge but even if they do, they will likely be small.

For Europe rates will start to come down within the next month or two (possibly even next week); for the UK it will be soon after, around the end of summer; and in the US, it will be once the November inflation figure is out of the way. Any sooner, and we’ve already pointed out the central bank will then get the blame for a resurgence in October even if it isn’t true.

Many economists think we can’t start lowering rates until America do, but, well, they’re wrong.

Now, onto the week that was.

In Europe

The pan-European STOXX Europe 600 Index ended 0.46% lower as hotter-than-expected eurozone inflation increased creating a little uncertainty about policy easing by the European Central Bank – who we think will shortly lower rates but will be cautious when doing so.

Major stock indexes also fell over this period.France’s CAC 40 Index dropped 1.26%, while Germany’s DAX declined 1.05%. Italy’s FTSE MIB ended the week flat. Here in the UK, the FTSE 100 Index lost 0.51%.

Headline inflation in the eurozone rose for the first time in five months, with the year-over-year increase in consumer price sticking up to 2.6% in May from 2.4% in each of the previous two months. This reading exceeded a consensus estimate of 2.5%. Services inflation accelerated to 4.1% from 3.7% in April. Meanwhile, a measure of core inflation that excludes energy, food, alcohol, and tobacco prices increased to 2.9% from 2.7%.

The unemployment rate fell to a record low of 6.4% in April after coming in at 6.5% in each of the prior five months. The number of unemployed people decreased by 100,000 from the previous month to 10.998million.

In the UK

Data from the Bank of England showed the amount of credit given to consumers halved in April, while mortgage approvals fell as buyers held out for a potential cut to interest rates later this summer.

Net consumer credit rose by just £0.73bn last month, well below the £1.42bn extended to consumers in March, which was revised down from £1.58bn. This was considerably below the £1.50bn expected by economists and was likely a result of higher borrowing costs.

Net borrowing through credit cards dropped to just £0.19bn from £0.66bn the month before, while other forms of credit like car finance and personal loans declined to £0.54bn from £0.76bn previously.

Individuals' borrowing of mortgage debt increased to £2.4bn from £0.5bn the month before. However, net mortgage approvals for house purchases - a closely watched indicator of future borrowing - fell to 61,100 in April from 61,300 in March, while net approvals for remortgaging fell to 29,900 from 33,500.

Investors were also mulling the latest figures from Nationwide, which showed that house prices returned to growth in May after two months of declines.

House prices were up 0.4% on the month following a drop of 0.4% in April and 0.2% in March. Economists had expected house prices to tick up 0.1% on the month. On the year, prices rose 1.3% in May following a 0.6% jump in April and a 1.6% increase in March.

Nationwide chief economist Robert Gardner said: "The market appears to be showing signs of resilience in the face of ongoing affordability pressures following the rise in longer term interest rates in recent months."

Elsewhere, industry research showed that UK retail footfall eased in May despite the bank holiday weekends and improving weather. According to the latest BRC-Sensormatic IQ footfall monitor, total footfall slipped 3.6% in May, although that was an improvement on April’s 7.2% slump.

All types of shopping destinations saw fewer visitors during the month. Footfall decreased by 2.7% on high streets, by 2.3% in retail parks and by 4.5% in shopping centres.

In equity markets, National Grid jumped after Jefferies reiterated its ‘buy’ rating on the energy infrastructure firm.

British Gas owner Centrica was a high riser after an upgrade to ‘outperform’ from ‘sector perform’ at RBC Capital Markets.

Whitbread advanced after JPMorgan Cazenove reiterated its ‘overweight’ rating on the Premier Inn owner. It said Whitbread continues to be one of its key convictions and sees the recent pullback - the shares are down 20% year-to-date - as "an opportunity to revisit the story".

On the downside, JD Sports Fashion tumbled after it reported lower-than-expected annual profits as it continued to invest in its store estate. Profits before tax and adjusting items of £917.2m were down 7.5%, against forecasts of £920m. Organic sales were up 9%.

Associated British Foods lost ground after UBS sold 10.3m shares in the Primark owner in a placing on behalf of its biggest shareholder, Howard Investments Limited.

In the US

In the US most of the major benchmarks closed lower over the holiday-shortened week but rounded out a month of gains. In contrast to much of the month, small-caps performed better than large-caps, and value stocks held up better than growth shares.

The technology-heavy Nasdaq Composite was especially weak, due in part to a sharp decline in cloud software provider Salesforce, which fell sharply after releasing first-quarter revenues that missed consensus estimates. Markets were shuttered Monday in observance of the Memorial Day holiday.

One prominent factor weighing on sentiment appeared to be the Treasury Department’s midweek auctions of five- and seven-year notes, which were met with subdued demand (as indicated by the so-called bid-to-cover ratio). According to our traders, the weak sales raised concerns that funding the U.S. deficit will drive up yields at a time when the Fed appears to be in no rush to cut rates.

In Asia

Japan’s stock markets generated mixed weekly returns, with the Nikkei 225 Index falling 0.4% and the broader TOPIX Index gaining 1.1%. A downward revision to U.S. economic growth data increased the likelihood that the Federal Reserve may cut interest rates at least once before the end of this year, lending some support to risk appetite globally.

In the currency markets, the yen depreciated to around JPY 157.3 against the U.S. dollar, from about 157.0 at the end of the prior week.

Chinese equities were little changed after an unexpectedly weak manufacturing reading highlighted growth headwinds on the economy. The Shanghai Composite Index was broadly flat, while the blue-chip CSI300 gave up 0.6%. In Hong Kong, the benchmark Hang Seng Index lost 2.84%.

The week ahead

Donald Trump’s guilty verdict, UK election campaigning and interest rate decisions will dominate the headlines next week, with the long-term result of all three likely to influence markets.

It will be a slightly quieter week for company news, with B&M and British American Tobacco the only two FTSE 100 firms reporting results.

Investors should, nonetheless, gain some insight into the state of consumer spending and the retail industry as Hollywood Bowl and WHSmith post financials. At the same time, the BRC will release its sales monitor.

On Thursday, we could witness the European Central Bank beat the UK and the US in the race to cut interest rates.

Analysts predict that the Germany-based institution will vote to drop borrowing rates from 4.5% to 4.25%, offering the first sign that economies are moving away from a high-interest rate environment.

Back to the UK and an update from Bellway plus housing data from Halifax will reveal whether there have been any improvements in the property industry over the last few months.

Meanwhile, BAT may become one of the first companies to benefit from the upcoming election, with Sunak’s anti-smoking bill at risk of not being passed through in time.

Finally, on Friday we’ll get the latest Non-FarmPayrolls number out of the US which always has traders on edge for a volatile day, although its true significance is probably less than the moves it causes.

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