Week ending 14th June 2024.

As you can see from the accompanying table markets were mixed this week.

US stocks broadly closed higher with the S&P 500 and Nasdaq touching record highs off the back of encouraging inflation data and a steady stance from the Federal Reserve on interest rates.

UK stocks struggled to gain momentum, while European stocks also faced declines. The STOXX Europe 600 Index dropped by 2.40% lead lower by political uncertainty, a cautious outlook from the US Federal Reserve, and disappointing economic data. France’s CAC 40 index dropped by over 6.2% this week after President Emmanuel Macron’s announcement of snap parliamentary elections. The potential for a far-right government and a strong leftwing opposition has unsettled European financial markets.

Investors are now looking forward to the UK Consumer Price Index (CPI) data and the Bank of England’s upcoming interest rate decision next week, which will be the last before the general election on July 4th.

The major highlight of the week was Wednesday’s release of the US CPI and the Federal Reserve’s interest rate decision.

Markets reacted positively to May’s inflation report which indicated an encouraging slowdown, with prices rising by 3.3% from a year ago, below forecasts and last month’s 3.4%. Core inflation, which excludes volatile items like food and energy, also showed a modest decline, coming in at 3.4% compared to the anticipated 3.5%. Despite the overall improvement, shelter inflation (one of the largest parts of the CPI basket) continues to offset declines in other areas. Monthly shelter costs increased by 0.4% and were up 5.4% year-over-year. However, it may just be a matter of time before declining rents show up in official inflation figures.

After inflation’s downward trend took a pause earlier in the year hindering policymakers’ ability to ease policy, recent figures are hopefully a positive indication that inflation may be resuming its descent. Just a few hours later the Federal Reserve announced that it would keep interest rates unchanged in the range of 5.25-5.5%.

Back in March, officials anticipated three rate cuts this year, but stalled inflation improvements over recent months have led officials to revise expectations to just one rate cut.

The Dot Plot indicated a more aggressive rate-cutting path for 2025, with four reductions totalling a full percentage point. Chair Jerome Powell’s cautious comments in the press conference highlighted the need for more good data for officials to gain confidence that inflation is stable and reaching the 2% target. Powell also noted that labour market supply and demand conditions have come into better balance, describing them as relatively tight but not overheated.

Also looking to Japan, the Bank of Japan announced plans to scale back its bond purchases and will detail its strategy next month to reduce its $5 trillion balance sheet, signalling a step toward unwinding its monetary stimulus. Governor Ueda mentioned a possible interest rate hike in July, despite declining consumption and economic sluggishness driven by the yen’s depreciation and rising import costs.

Coming up next week: UK CPI, the Bank of England’s interest rate decision and UK retail sales as well as Chinese housing data, industrial production, retail sales and unemployment rate. Eurozone and Irish inflation figures are due as well as US retail sales and industrial production.

Kate Mimnagh, Portfolio Economist

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