Weekly Markets Review

28th May 2024

Markets last week

• Key market drivers last week included UK and Japanese inflation, the minutes from the most recent Federal Open Market Committee (FOMC) meeting, and big tech earnings

• Equity markets gave back a small portion of the gains seen so far in May. Bond markets also lost some ground on the back of the new economic data

• In the UK, inflation in April slowed from 3.2% in March to 2.3% in April, not as much as anticipated

• Sticky services inflation remains a key concern, decelerating by a meagre 0.1% to 5.9%. This extinguished the chances of a June rate cut with the first priced in for November

• Mr Sunak’s call for a 4 July General Election came as a surprise but there was no noticeable reaction from markets. Nonetheless, political noise is expected to increase in the weeks ahead as electoral campaigns get underway

• It was a mixed week for UK equities with small and mid-cap companies outperforming large caps. The FTSE 100 Index fell 1.2% while the mid-cap FTSE 250 Index rose 0.1%. Yield sensitive sectors underperformed

• US equities were the best performing major equity market helped by strong tech sector earnings. US equities were flat in US dollar terms but due to currency weakness sterling investors returned -0.2%

• Japanese government bond yields continued their upward trend with the 10-year yield rising above 1% for the first time since 2012. Inflation in Japan came in at 2.5%, mildly above expectations.

The week ahead:

• Friday: Eurozone inflation is expected to rise marginally from 2.4% to 2.5%, largely driven by the base effects from public transport in Germany

• Friday: US Personal Consumption Expenditures (PCE) inflation is anticipated to evidence further disinflation largely due to a significant drop in the volatile airfares component. Core PCE is expected to drop from 0.3% month on month in March to 0.2% in April.

---

Analysis

There were a few key drivers for markets last week including UK and Japanese inflation, the minutes from the most recent FOMC meeting and big tech earnings. Equity markets gave back a small portion of the gains seen so far in May. Bond markets also lost some ground on the back of the new economic data.

Let’s start in the UK where there was a lot of anticipation ahead of April’s inflation figure as economists had forecast a significant drop back towards the 2% target rate. Inflation came in hotter than anticipated although it fell significantly from 3.2% in March to 2.3% in April.

The main area of concern was sticky services inflation which was anticipated to slow from 6% to 5.4% but only managed to decelerate by 0.1% to 5.9%. Services inflation remains too high for the Bank of England to be comfortable cutting interest rates and the slow progress in this area has extinguished the chances of a June rate cut with the first priced in for November. The inflation miss led to a fall in UK government bond prices with the 10-year yield rising 0.13% to 4.26%.

Mr Sunak’s call for a 4 July General Election came as a surprise but there was no noticeable reaction from markets. Nonetheless political noise is expected to increase in the weeks ahead as electoral campaigns get underway. With Labour well ahead in the polls the Conservatives have their work cut out.

With this backdrop it was a mixed week for UK equities with small and mid-cap companies outperforming large caps. The FTSE 100 Index fell 1.2% while the mid-cap FTSE 250 Index bucked the trend rising 0.1%. With the hot inflation number and the rise in bond yields it was the more yield sensitive sectors that underperformed with utilities, communication services and real estate amongst the worst performing sectors.

US equities were the best performing major equity market helped by strong tech sector earnings. US equities were flat in US dollar terms but due to currency weakness sterling investors returned -0.2%. The only sector to end in positive territory was technology as the artificial intelligence driven boom was reflected in first quarter earnings data. The tech sector makes up almost a third of the US equity market and has driven most of the market’s earnings expansion in the last 12 months.

Outside of the tech / semiconductor space risk sentiment weakened as the most recent minutes from the FOMC meeting were revealed. Officials struck a hawkish tone discussing whether conditions were restrictive enough and indicating that the neutral policy rate may have to be higher than previously expected. Compounding this narrative was the flash Purchasing Managers’ Index (PMI) which indicated that business activity in May accelerated at the fastest pace in two years. This sort of economic resilience will make it difficult for inflation to cool sufficiently for the Federal Reserve (Fed) to cut interest rates.

Japanese government bond yields continued their upward trend with the 10-year yield rising above 1% for the first time since 2012. Inflation in Japan came in at 2.5%, mildly above expectations. Unlike in other regions, in Japan the current inflationary surge is seen as a positive as the country has struggled to generate a healthy rate of price appreciation for years.

Recently, the Bank of Japan (BoJ) has started to retreat from its ultra-accommodative monetary policies, which included negative interest rates and yield curve control, a shift that was initiated in March after over seven years of negative interest rates. The BoJ has scaled back its bond purchasing programs, a move that has allowed yields on Japanese government bonds to start creeping up. This shift towards policy normalisation could bolster the Japanese yen, which has been under pressure due to the significant interest rate differential between Japanese bond yields and those of US treasuries.

---

The Week ahead

Friday: Eurozone inflation

Our thoughts: Inflation in the Eurozone is expected to rise marginally from 2.4% to 2.5%, largely driven by the base effects from public transport in Germany. A base effect refers to the impact of a data point from a previous year dropping from the year-over-year calculation. For the same reason core inflation is projected to increase to 2.8% from 2.7%. The trajectory of services inflation will be key in determining the pace of interest rate cuts in the second half of 2024 with the European Central Bank expected to cut rates in June.

Friday: US PCE inflation

Our thoughts: The Fed’s preferred inflation measure (core PCE) will be released on Friday and is anticipated to evidence further disinflation largely due to a significant drop in the volatile airfares component. Core PCE is expected to drop from 0.3% month on month in March to 0.2% in April.

---

Your weekly market review was powered by Canaccord Genuity Wealth Management (CGWM)

---

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable. Past performance and future forecasts figures are not a reliable indicator of future results.