Market Commentary 28th May 2024 – from Charlie Hancock

Inflation data showed that UK consumer prices rose by 2.3% year-on-year in April, with price rises slowing from the 3.2% recorded in March. The headline inflation rate was higher than expected, with the median economist estimate being 2.1%.

The hotter than expected inflation data prompted increasing debate around whether the Bank of England (BoE) will cut interest rates in June. Some economists believe that Prime Minister Rishi Sunak’s decision to call a General Election on the 4^th July could also impact the BoE’s decision making, with the central bank potentially waiting until after the election before making any interest rate changes.

An initial reading for a Eurozone Purchasing Managers’ Index (PMI) showed that for the overall economy, business activity accelerated during May. The reading for the manufacturing sector remained in contractionary territory for the 14^th consecutive month, but this was offset by growth in the services sector.

The President of the European Central Bank (ECB), Christine Lagarde, stated that there was a “strong likelihood” the central bank will cut interest rates in June. Lagarde added that she could not commit to a rate cut being implemented next month, but said it is likely, assuming incoming data reinforces their confidence around inflation returning to the 2% target.

A PMI reading for May indicated that business activity in the US expanded at a strong pace. The data pointed to a modest improvement in the manufacturing sector, whilst the services sector reportedly saw strong growth during the month. S&P Global, the company behind the PMI data, said that firms reported an uptick in selling prices, pointing to consumer price inflation being “modestly above target”.

Data on the US housing market pointed to weak activity. The number of existing home sales declined for the second month in a row during April, whilst the inventory of available properties increased. New home sales also saw a steeper than expected decline.

Concerns around Chinese military pressure on Taiwan escalated last week, after China’s army conducted drills in the South China Sea and Taiwan strait. The exercises took place in the immediate aftermath of Taiwan’s new president taking office. The military drills resulted in headlines regarding the chipmaking giant, Taiwan Semiconductor Manufacturing Co (TSMC), with experts in the field reporting that TSMC would be able to disable their machines in the event of China invading Taiwan. Last week’s news flow on the domestic economy in China largely related to the property market, with Chinese banks reportedly increasing lending to state-owned companies willing to buy unsold properties.

PMI data for Japan pointed to the manufacturing sector experiencing growth for the first time since early 2023, although the pace of growth was relatively weak. The services sector continued to see expansionary conditions, although the rate of expansion appeared to slow from April’s level. Meanwhile, with the Japanese Yen experiencing further weakness last week, speculation grew around the Bank of Japan (BoJ) tightening monetary policy to try and shore up the currency.

Government bond yields rose around the globe, whilst speculation that the BoE may forego a June rate cut also appeared to contribute to the increase in Gilt yields.

Although the ECB chief, Christine Lagarde, refused to commit to a June rate cut during a television interview last week, her comments were broadly interpreted as dovish, with many economists expecting that the central bank will cut rates by 0.25% next month.

GBP / EUR – Current 1.1743 Previous 1.1686

The Pound gained 0.28% against the US Dollar and 0.49% against the Euro last week. Rishi Sunak’s general election announcement appeared to have little impact on the Pound, with currency traders appearing unphased by the potential for policy changes from a new government.