Market Commentary 19th August 2024 – from Will Binks

Inflation data showed that the Consumer Price Index (CPI) saw a year-on-year rise of 2.2% in July, up from 2.0% in June, but lower than the forecasted 2.3%. Housing and household service prices rose faster than predicted, contributing to the increase in headline inflation. Core inflation, which excludes energy and food prices, eased to 3.3% from 3.5% the month before as services inflation slowed to the lowest since June 2022.

The Office for National Statistics (ONS) reported that the UK economy expanded by 0.9% year on year during the second quarter of 2024. This is an increase from 0.3% in quarter one and the fastest annual growth in almost 2 years.

The ZEW, a major economic research institute in Germany, released data on their Economic Sentiment for Germany survey. The data is gathered by interviewing up to 300 experts from banks, insurance companies and financial departments. According to the ZEW, German Economic Sentiment dropped to the lowest in 7 months, driven by poor profits by large German corporates and concern about further potential escalation in the middle east.

An initial estimate of Gross Domestic Product (GDP) released for the second quarter of 2024 suggested the economy in the Euro Area expanded by 0.6% year on year, up from 0.5% in the first quarter of the year. Employment also rose by 0.2% from the previous quarter, pointing to further stability over the past 6 months in the European labour market.

Investors paid close attention to inflation data in the US last week, which showed headline inflation slowed for the fourth consecutive month to 2.9%. Inflation eased for transportation and prices continued to decline for new and used vehicles.

The continued slowdown in price rises has increased the support for the Federal Reserve to cut interest rates as their September meeting. Mary Daly, president of the San Francisco Fed, said that recent data has given her more confidence that inflation is under control and it is time to consider reducing interest rates.

Japan released an initial GDP estimate last week, suggesting the economy saw year on year growth of 0.8% in the second quarter of 2024, up from a contraction of 0.5% in the previous quarter. This came as Japan’s Prime Minister, Fumio Kishida, announced he would step down from his role in September.

China saw mixed economic data last week as retail sales rose 2.7% in the year to July, higher than the forecasted 2.6%. Meanwhile, industrial production rose at a slower than expected rate of 5.1%, 0.1% lower than forecasted.

UK government bond yields declined across the week as markets await the upcoming Jackson Hole symposium, an annual conference hosted by the Federal Reserve and attended by global central bank leaders.

Investors closely watched business activity and economic data ahead of the next European Central Bank’s interest rate decision in September, the 10-year bund yield was volatile, but moved broadly sideways across the week.

The market is now expecting a 0.25% interest rate cut in September, with a 0.50% cut still on the table as a potential option.

GBP / EUR – Current 1.1735 Previous 1.1687

The Pound gained 1.82% against the US Dollar and 0.41% against the Euro as economic data was released globally.

Gold reached an all-time high of $2,509.65 on Friday last week as investors sought safe-haven assets and following the increased likelihood of an imminent US interest rate cut.