Market Update – 19th June 2024.

Earlier this morning, the latest UK CPI report revealed inflation has eased to the Bank of England’s 2% target on year in May, down from 2.3% in April – something only last seen back in July 2021. Of course, this doesn’t mean that prices have declined, just that they are rising at a slower rate, but it is momentous amidst the cost of living crisis and perhaps suggests that rate cuts may not be too far away.

The Office for National Statistics revealed that the tempering of price growth is largely down to declining food prices, although fuel ticked up. Core inflation – minus volatile elements such as food and fuel – fell to 3.5% in May in line with forecasts. Meanwhile, services inflation eased to 5.7% from 5.9%, but above forecasts of 5.5%.

As the data closely precedes the Bank’s interest rate decision meeting, many are wondering if a cut will in fact materialise in June. However, wage growth and services inflation are still running ahead of inflation at around 6%. Taken together with a July election announcement, it is unlikely that market participants will see a reduction in rates before August at the earliest. Policymakers are still expected to keep rates unchanged at 5.25% tomorrow, amid concerns that inflation may tick up later in the year. Market expectations are still showing greater chance of rate cuts in September.

Looking to China retail sales rose by 3.7% year-on-year in May from 2.3% growth in April, marking the fastest incline since February and surpassing market expectations. Data came alongside industrial output reports for the region in May. While coming in below forecasts, output still illustrated an expansion year-on-year of 5.6%. Fixed asset investments also rose 4% in May in annualised terms.

These latest indicators undoubtedly showcase the Chinese economy’s resilience, demonstrating a continued rebounding of consumption following increasingly improved job and wage data and a slow but steady enhancement of consumer confidence. While policymakers are still working through hurdles in the property sector that are arguably making consumer spending lag somewhat (and that are being latched onto by the market), we are likely going to see incremental improvements to this issue thanks to their penchant for implementing economic stimuli.

Retail sales for the US inched up in May by 0.1% but fell short of expectations. The modest increase stands in contrast to a 0.2% ‘revised down’ decline in April. While it is unlikely that we will see a severe dip in American consumers’ spending – nor even a slump – this data suggests that shoppers are not wholly immune to the higher-for-longer interest rate environment they’ve been living in now for some time. In response, the market further priced in a rate cut by the Federal Reserve in September.

Still to come this week we have the eagerly anticipated Bank of England’s interest rate decision, UK retail sales and PMI data, Eurozone consumer confidence and PMI data and US PMI data.

Nicola Tune, Portfolio Specialist

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