This week in review: the FTSE slides

London stocks closed with mixed results on Friday, influenced by earlier declines in the US and Asian markets, as investors reacted to a larger-than-expected drop in UK retail sales.

The FTSE 100 index dipped 0.26%, ending the day at 8,317.59 points and down -1.22% on the week, while the FTSE 250 saw a gain of 0.68%, closing at 20,770.93.

In currency markets, sterling was last up 0.34% on the dollar to trade at $1.2742. Against the Euro the pound remained fairly flat trading at €1.1742.

Earlier in the week UK inflation figures slowed slightly less sharply than expected to 2.3% in April, the lowest level in almost three years, from 3.2% in March. While this has dampened hopes in the market that the Bank of England will lower borrowing costs midyear, we see CPI dipping below 2% in June and a rate cut coming by Autumn.

The consensus and BoE projection had pegged headline inflation at 2.1%. Core inflation, which excludes volatile energy and food prices, also surprised on the upside at 3.9%. 

Retail sales in the UK saw a significant decline in April, according to official data released Friday.

The Office for National Statistics reported that retail sales volumes fell by 2.3% last month, following a revised 0.2% decline in March, previously estimated at 0.0%.

Analysts had anticipated a smaller drop of around 0.5%.

The decline was attributed to poor weather, which kept shoppers at home, leading to decreased sales across most sectors, particularly in clothing, sports equipment, games, toys, and furniture.

Non-food store sales volumes fell by 4.1%.

Despite the monthly drop, sales rose by 0.7% in the three months to April compared to the previous quarter.

However, year-on-year sales were down 2.7%, remaining 3.8% below pre-pandemic levels. The downturn contrasted with recent positive economic indicators, including improved consumer confidence, which showed signs of improvement in May.

The GfK consumer confidence index rose two points to -17, driven by increased optimism about the economy and personal finances.

Expectations for the general economic situation over the next year climbed four points to -17, while the forward-looking personal finance situation jumped five points to 7.

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In Europe

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The STOXX Europe 600 Index ended 0.45% lower, on the week as questions emerged about the pace of potential interest rate cuts this year from the ECB. Major stock indexes were mixed. Italy’s FTSE MIB lost 2.57%, while France’s CAC 40 Index declined 0.89%. Germany’s DAX was little changed.

The first estimate of eurozone composite purchasing managers’ index (PMI) for May came in at a 12-month high of 52.3, up from 51.7 in April. (PMI readings greater than 50 indicate an increase in activity.) Services activity remained firmly in expansionary territory; manufacturing PMI improved but remained at contractionary levels for the 14th consecutive month. Input costs and output prices eased from April’s levels but remained above pre-pandemic averages.

The European Central Bank said negotiated wages in the first quarter rose 4.7% year over year, partly due to one-off payments, up from 4.5% in the final three months of 2023. ECB economists said in a blog post that they expect negotiated wage growth to remain elevated in 2024, although they also believe wage pressures are set to decelerate.

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In the US

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In the US, the major indexes recorded widely varying results over the week, with the Dow Jones Industrial Average recording its biggest weekly loss (-2.33%) since early April, while the technology-heavy Nasdaq Composite continued its recent march into record territory. The broad S&P 500 Index was roughly flat, while small-cap stocks lost ground. The disparate returns were also reflected in the substantial underperformance of an equal-weighted version of the S&P 500 Index, which trailed its more familiar, market-weighted counterpart by 127 basis points (1.27 percentage points). The market was scheduled to be closed the following Monday in observance of theMemorial Day holiday.

Inflation data in the report appeared to especially concern investors. “Selling price inflation has meanwhile ticked higher and continues to signal modestly above-target inflation,” S&P Global’s chief economist noted. “What’s interesting is that the main inflationary impetus is now coming from manufacturing rather than services, meaning rates of inflation for costs and selling prices are now somewhat elevated…[suggesting] that the final mile down to the Fed’s 2% target still seems elusive.”

A rate cut in the US now seems unlikely this year. The Fed is desperate to start lowering rates, but right now, there are simply no reasons for them to do so.

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In Asia

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Japanese equities finished the week lower, with the Nikkei 225 Index falling 0.36% and the broader TOPIX Index experiencing a marginal decline. Equities were supported by upbeat economic data releases and a stellar earnings update from U.S. chip giant NVIDIA, which helped liftJapanese tech stocks.

However, all gains were lost on Friday as Japanese indexes tracked Wall Street lower after U.S. data pushed the potential for a U.S. interest rate cut further out. It was a notable week for Japanese bond markets as 10-year government bond yields reached the 1.0% level for the first time in 11 years.

Flash economic data released during the week showed Japanese manufacturing activity recovered in May, expanding for the first time in more than a year. The manufacturing PMI climbed to 50.5 this month, up from 49.6 in April. In contrast, the services PMI eased a little in May, falling to 53.6 from 54.3 the prior month but remaining in healthy expansive territory.

Chinese stocks retreated as fears that rates would remain elevated in the U.S. offset optimism about Beijing’s latest measures to shore up the ailing property sector. The Shanghai Composite Index declined 2.07%, while the blue-chip CSI 300 lost 2.08%. In Hong Kong, the benchmark Hang Seng Index fell 4.83%, according to FactSet.

The People’s Bank of China (PBOC) announced a historic rescue package for the property sector in the prior week as data showed no sign of let-up in China’s housing crisis. Measures included a re-lending program that would extend RMB 300 billion in low-cost funds to a select group of state-owned banks to lend to local state-owned entities for buying unsold homes, removing the nationwide floor level of mortgage rates, and lowering the minimum down payment ratio for home purchases. While most investors welcomed the plan, some remained sceptical on whether it will draw a line under the property slump, which remains a key drag on the world’s second-largest economy.

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The week ahead

Rate cut expectations in the US will take centre stage once again next week as inflation figures and gross domestic product estimates are both released.

Markets anticipate personal consumption expenditures (PCE) inflation, due Thursday, will have eased to 2.6% in April, againstMarch’s 2.7%.

Core PCE is expected to have subsided from 2.8% to 2.7% in the meantime, which, following cooler consumer and producer price figures earlier in the month, will aid forecasts for rate cuts by the Fed, currently expected in December.

The minutes from the Fed’s meeting in May, which followed three straight months of higher-than-expected inflation reports, revealed that ‘various’ participants would be willing to hike rates further if necessary.

A second estimate for first-quarter gross domestic product is due before this on Wednesday, expected to show 1.5% growth against 3.4% previously, alongside jobs data.

Inflation figures will also be in focus in the Eurozone, as any upside shock on an expected 2.4% rise in prices threatens anticipations for a rate cut by the ECB in June.

In the UK, shop and house price data on Wednesday and Friday respectively should delve into the health of each sector, as sales slumped in the former last month.

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Have a greatweekend and we’ll give you a market update on Wednesday.

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