Market Commentary 13th May 2024 – from Charlie Hancock

Data for UK Gross Domestic Product (GDP) showed that the economy emerged from recession during the first quarter of 2024. GDP expanded by 0.6%, which was stronger than expected. Consumption appeared to drive the bulk of the recovery in the first quarter, with the Office for the National Statistics (ONS) citing higher spending on recreation, restaurants and hotels. UK economic growth for 2024 as a whole is expected to be relatively weak with a median economist estimate of 0.4% growth.

The Bank of England (BoE) voted to keep interest rates on hold at 5.25%. The monetary policy committee voted 7-2 in favour of keeping rates at the current level, with the central bank’s Deputy Governor Dave Ramsden and economist Swati Dhingra being in favour of a 0.25% cut.

Economic data in Germany painted a mixed picture. Factory orders fell by 0.4% in March, signalling weak demand, however, exports rose by 0.9% during the same period, suggesting strong international demand for German made products.

Riksbank, the Swedish central bank, cut interest rates by 0.25% last week, which marked the central bank’s first interest rate cut since 2016. The central bank signalled that a further slowdown in inflation could support a further 2 interest rate cuts before the end of 2024. This policy move appeared to fuel expectations for the European Central Bank (ECB) to begin cutting rates next month.

Last week’s data generally pointed to slowing growth and a cooling labour market. Weekly jobless claims came in higher than expected at 231,000, marking the highest number of claims since August 2023. Continuing unemployment benefit claims also moved higher.

A closely watched consumer sentiment index compiled by the University of Michigan fell by more than expected, with the index reaching a 6 month low. Consumers expressed concerns about inflation, unemployment and interest rates.

China’s President Xi visited Europe last week, which included a meeting with French President Emmanuel Macron. Xi reportedly urged Macron to avoid a “new cold war” with China, which was interpreted as a sign that Xi’s government are not happy about Europe’s growing ties with the US on trade and security related issues. Meanwhile, support measures for China’s property market appeared to ramp up, with authorities in major cities scrapping restrictions on home purchases. Troubled property developer Country Garden told creditors that it would not be able to cover upcoming interest payments owed on two of its bonds, but said that a state backed guarantor would meet the payments.

Economic data in Japan provided some evidence of a slowdown. Real wages declined by 2.5% in March, following a fall of 1.8% in February. The data prompted debate around whether the Bank of Japan will be confident that sustainable wage inflation is likely. The central bank has highlighted that this is a key factor to support further interest rate hikes. The BoJ’s governor, Kazuo Ueda, highlighted last week that a weaker Yen could spur rises in inflation and signalled that interest rates may need to rise to offset some of the risks around currency weakness.

Although the Bank of England (BoE) kept interest rates on hold, the bank’s governor, Andrew Bailey, stated that rates might need to be reduced by more than markets currently expect. These comments, together with 2 members of the monetary policy committee voting for a cut, appeared to support the downward move in Gilt yields.

During the week, Sweden’s central bank became the first major central bank in the region to cut interest rates in this cycle. This was widely interpreted as a sign that the ECB will be under pressure to begin implementing rate cuts from next month

The week’s higher than expected jobless claims and worse than expected consumer sentiment data appeared to have little impact on US government bond yields last week.

GBP / EUR – Current 1.1629 Previous 1.1658

The Pound gave up some ground against both the US Dollar and the Euro, falling by 0.18% and 0.25% respectively. Speculation that the Bank of England may begin cutting interest rates next month appeared to contribute to a weaker Pound.