Market Commentary 29th April 2024 – from Charlie Hancock

Purchasing Managers’ Indices (PMIs) for the UK signalled that the economy expanded during April, with business activity rising at the strongest pace for 11 months. The improvement was driven by the services sector, with the manufacturing sector slipping back into contractionary territory after seeing activity improve during March. Whilst the headline PMI reading for the overall economy pointed to improving conditions, businesses appeared to remain cautious about the outlook, citing cost of living pressures and subdued consumer confidence.

The chief economist for the Bank of England (BoE), Huw Pill, pushed back against calls for interest rate cuts, stating that “inflation must be squeezed out of the economy” before interest rates are reduced.

A composite PMI for the Eurozone pointed to activity rising for the 2^nd consecutive month, with growth in the services sector offsetting continued weakness for the manufacturing sector. Meanwhile, a closely watched business confidence survey in Germany indicated that firms grew more optimistic for the third month in a row.

European Central Bank (ECB) officials appeared to take a more hawkish tone last week after other ECB policymakers recently hinted at a June rate cut. The President of Germany’s Bundesbank stated that whatever decision is made in June, it “would not necessarily be followed by a series of rate cuts”.

US economic data surprised to the downside. PMI data for April showed that the manufacturing sector slipped back into recessionary territory after growing during March and although the reading for the services sector signalled growth, it came in weaker than expected.

Official Gross Domestic Product (GDP) data released on Thursday showed that the US economy expanded at an annualised pace of 1.6% during the first quarter of 2024, which was significantly below the median economist estimate of 2.5%. Meanwhile, the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) index, showed that annual inflation was 2.7% in March, with inflationary pressures appearing to worsen during the month. The data prompted concerns around the US economy experiencing ‘stagflation’, where growth is slowing but inflation rises.

Deteriorating US-China relations dominated business headlines last week. President Biden signed a bill ordering Chinese Tech company ByteDance to sell TikTok or the app will face a ban in the US after 270 days. ByteDance said they would fight against the bill. Meanwhile, the Secretary of State for the US, Antony Blinken, met with China’s President Xi. Blinken reportedly criticised China’s support for Russia and warned that US firms were ready to impose additional sanctions on Chinese companies that support the war in Ukraine.

Last week saw the Japanese Yen continue to weaken against most major currencies, particularly the US Dollar. The governor of the Bank of Japan (BoJ), Kazuo Ueda, acknowledged that prolonged currency weakness poses risks for the Japanese economy, adding that the BoJ will continue monitoring foreign exchange markets. The BoJ kept interest rates on hold following their policy meeting, but Ueda signalled that further rate hikes could be implemented in the 2^nd half of the year. PMI data for Japan pointed to the economy expanding during April, whilst business confidence improved.

Hawkish comments from the BoE contributed to diminishing expectations for the central bank to begin cutting rates in June.

Comments from ECB officials appeared to contribute to rising Eurozone government bond yields. Isabel Schnabel, an economist at the central bank, pointed to sticky services inflation as a concern and said that the last mile to 2% inflation could be “quite bumpy”.

The week’s data provided evidence that the US economy is slowing, however, with inflation appearing to remain sticky, the Federal Reserve may face pressure to keep monetary policy tight.

GBP / EUR – Current 1.1682 Previous 1.1609

The Pound regained some ground against other currencies last week, rising by 0.99% against the US Dollar and 0.63% against the Eurozone currency.