| USA The FOMC launched a mildly hawkish contingency plan on the back of the significant setback in inflation’s progress toward target during Q1. That verbal guidance was made concrete as the FOMC kept its policy rate unchanged at 5.25% to 5.5%. This is a huge contrast to the dovish signalling at the start of this year. Ahead of this highly anticipated event the main question was how much higher the new policy rate should turn out? Clearly higher this year, but less so for 2025, possibly the relief of slightly cooler inflation in April and May curbed the hawkishness. Notably, the FOMC is still divided on the number of cuts for 2024, with 8 seeing two cuts, 7 seeing one cut and 4 not seeing any cuts. At the press conference, Fed Chair, Jerome Powell, underscored, however, the “everyone” sees the policy path as data dependent. The Consumer Price Index (CPI) was weaker than anticipated in May, with both the headline (+0.0%) and the core measure (+0.2%) coming in one tick below consensus expectations. Energy prices registered the steepest decline in seven months (-2.0%), which certainly helped keep headline inflation stable in the month, but this came as no surprise given the sharp drop in prices at the pump. Prices in the ex-energy segment, for their part, advanced just 0.2%, the least since September 2021. This was made possible notably by the fact that food prices increased a scant 0.1% month on month. Year-on-year, food inflation fell to a 50-month low of 2.1%. The 12-month headline inflation rate came in at 3.3%, a tick down from the prior month and one short of consensus expectations. The 12-month core measure, meanwhile, eased from 3.6% to a three-year low of 3.4%. This, too, was one-tenth shy of the median economist forecast. The price of core goods was flat month on month on a fairly diffuse easing of price pressures. The NFIB Small Business Optimism Index climbed from 87.7 in April to 90.5 in May, its highest level of 2024 but still well below its historical average of 98. The net percentage of firms that expected the economic situation to improve moved up from -37% to -30%. The Import Price Index (IPI) declined 0.4% in May, more than the median economist forecast calling for a -0.1% print. The headline print was negatively affected by a 1.7% decline in the price of petroleum imports. Excluding this category, import prices still declined 0.3%, the most in a year. On a 12-month basis, the headline IPI remained unchanged at 1.1%. The less volatile ex-petroleum gauge moved from 0.6% to 0.4%. The Producer Price Index (PPI) for final demand dipped 0.2% MoM in May instead of rising 0.1% as per the consensus economist forecast. Goods prices slid 0.5%, dragged down by a 3.4% decline in the energy segment while food prices stagnated (-0.1%). The services index, for its part, fell 0.2%. The core PPI, which excludes food and energy, stalled in the month, coming in below the 0.3% gain expected by consensus. YoY, the headline PPI went from 2.3% to 2.2%. Excluding food and energy, it slipped from 2.5% to 2.4%, one tick above the median economist forecast. The University of Michigan Consumer Sentiment Index tumbled from 69.1 in May to 65.6 in June, its lowest reading in 7 months. The deterioration of sentiment was due to a worse assessment of both longer-term perspectives (from 68.8 to 67.6) and current conditions (from 69.6 to 62.5). Twelve-month inflation expectations remained unchanged at 3.3%, while 5/10-year expectations increased from 3.0% to 3.1%. The major indexes ended mostly higher for the week, with the S&P 500 Index and Nasdaq Composite touching new highs. The market’s advance remained exceptionally narrow for the second consecutive week, however, with an equally weighted version of the S&P 500 trailing its more familiar, capitalisation-weighted counterpart by 215 Basis points (2.15 percentage points). Relatedly, enthusiasm over the potential of Artificial Intelligence appeared to provide a continuing tailwind to technology-related stocks and growth shares, which outpaced value stocks by the largest margin since March 2023 (461 Basis points), according to Russell indexes. UK GDP for April has come out at 0.0% MoM, 0.6% YoY. Industrial production was down 0.9% MoM, and down by 0.4% YoY, while manufacturing production was down 1.4% MoM, and up 0.4% YoY. Construction output fell by 3.3% YoY. Given the General Election campaign, these numbers will be used by each side to support their case, but these figures are generally in line with consensus. The apparently flat data seen in April does hide some movement, services were up 0.2%, but this was countered by falls to both production and construction. April’s data was always going to be soggy, given the amount of rain that fell at the time. The UK Met Office reports that it was the sixth wettest April since 1836, with 55% more rain and only 79% of the normal amount of sunshine. Construction not only had to contend with the wet weather, but the fact that interest rates are now set to fall more slowly than many in the market had initially anticipated, and thus while property yields have reached a new equilibrium, the necessary boost from lower cost capital remains absent. EU Comments from European Central Bank President Christine Lagarde confirming that restrictive monetary policy in Europe has not ended, and not to expect any further rate cuts any time soon, did little to sway the mood. The uncertain political environment was also acutely reflected in European bond markets. Government bonds sold off sharply early in the week, with 10-year French and Spanish yields surging to their highest levels this year, before ultimately receding toward the week’s end. France’s 10-year yield, for example, surged more than 20 basis points from last week’s close, to around 3.34% on Tuesday, as the snap election raised concerns about the country’s already fragile public finances. Meanwhile, German bond yields fell, seemingly due to a bid for safety in reaction to the situation in France. Macro updates later in the week provided a mixed picture, at best, and meant that European equities generally ended the week negatively inclined. On the plus side, Euro area trade data showed a surplus balance in April, as exports growth far exceeded imports. However, industrial production fell unexpectedly in April, easing 0.1%, against a forecast 2% growth. In local currency terms, the pan-European STOXX Europe 600 Index returned -2.39% as political uncertainty undermined confidence following the strong showing by far-right parties in the European Parliament elections the previous weekend. None of the major European bourses avoided the fallout: Italy’s FTSE MIB fell 5.76%, Germany’s DAX gave up 2.99%, and France’s CAC 40 Index shed 6.23%. CHINA Data from the Dragon Boat Festival highlighted the consumer caution in China. Tourism revenue over the three-day holiday rose 8.1% from the 2023 break but lagged pre-pandemic levels, according to Ministry of Culture and Tourism data. Domestic traffic rose 6.3% from last year. However, average spending per traveler fell 12.3% from 2019, Bloomberg reported, citing Citigroup research. Some analysts predict that the government will continue rolling out support to stoke demand as weak consumer sentiment remains a drag on the economy. China’s Consumer Price Index rose a below-expected 0.3% in May from a year earlier, unchanged from April’s rise. Core inflation, which strips out volatile food and energy costs, rose 0.6%, slowing from April’s 0.7% increase. The producer price index fell 1.4% from a year ago, its 20th month of decline, but eased from a 2.5% drop in April. Weak consumer confidence and a protracted property sector slump have kept a lid on prices in China despite numerous measures from Beijing to prop up the economy and markets over the past year. Chinese equities fell in a holiday-shortened week as data showed that deflationary pressures continued to weigh on the economy. The Shanghai Composite Index declined 0.61%, while the blue-chip CSI 300 gave up 0.91%. In Hong Kong, the benchmark Hang Seng Index was down 2.31%, according to FactSet. Markets in China were closed Monday for the Dragon Boat Festival. |
| Sources: T. Rowe Price, Wells Fargo, Handelsbanken Capital Markets, National Bank of Canada, M. Cassar Derjavets. |
