Market Update – 22nd May 2024.

Reports this morning showed that the latest UK headline inflation rate saw prices rising by 2.3% on year in April, in comparison to March’s 3.2% climb. It’s important to remember that a decrease in inflation doesn’t mean prices are falling; it just means they are increasing at a slower pace.

As this figure is largely shaped by the decline in energy prices year on year due to the reduction in the Ofgem price cap, Bank of England (BoE) policymakers are likely to focus instead on the core rate, which excludes volatile elements such as food and energy. This figure lowered to a growth of 3.9% (expected was 3.6%) down from 4.2% last month.

Whilst inflation figures came in slightly hotter than expected, inflation continues to move steadily towards the 2% target.  Today’s latest readings provide evidence that the ‘higher for longer’ interest rate environment the economy has been living in for some time now is having the BoE’s desired effect – discouraging consumer demand in order to decrease price growth. And yet, the market believes it may not be the ‘fresh data’ policymakers wanted to make a rate cut in June, with expectations for this dropping from 50% to 15% after the announcement.

Japan’s tertiary industry activity index, which measures the performance and output of Japan’s services sector, fell by 2.4% after gaining 2.2% in February. Transport, retail trade and medical and healthcare activities were amongst those that declined, while electricity, gas and water related business services increased. This likely won’t shape the Bank of Japan’s stance on interest rates, given that policymakers’ eyes remain firmly fixed on wage growth and how to shore up demand-driven inflation.

Initial reports also showed this week that some leading companies in Japan settled on wage increases of 5.58% (on average), marking the most substantial jump in wage growth for 33 years. This year’s ‘Shunto’ (i.e. Spring wage talks) saw labourers in particular demanding more than previous years due to labour shortages and inflationary pressures.

Over in China, Vice Premier He Lifeng promised in a financial meeting on Tuesday that policymakers will control risks in the property sector, local government debt and small local financial institutions to keep the region on the right path for continued economic momentum. The declaration comes hot on the heels of Beijing policymakers announcing recently that there will be an increase in financial stimulus to help China achieve their 5% GDP target this year. He Lifeng said that the stumbling blocks to growth success in the region are intertwined and will be tackled by more financial support as well as promotion of quality social and economic developments.

Still to come this week we have Fed minutes, UK, US and Eurozone PMI data, Japan’s inflation rate and UK retail sales.

Nicola Tune, Portfolio Specialist

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