Week ending 21st June 2024.

In a closely watched decision on Thursday 20th June, the Bank of England (BoE) held rates steady at 5.25%, aligning with market expectations. It comes after official figures published on Wednesday showed that the headline rate of inflation fell to the BoE 2% target in May.

Seven members of the Monetary Policy Committee voted to hold rates; two voted for a cut to 5%. Those advocating for a hold emphasised the finely balanced nature of their decision. Behind policymakers’ decisions lies a nuanced shift in tone, indicating the potential for policy-loosening shortly.

The Committee noted that the timing of the general election on 4 July was not relevant to its decision at this meeting, which would as usual be made based on what was judged necessary to achieve the 2% inflation target sustainably.

BoE governor Andrew Bailey expressed concerns over persistent pockets of high inflation, specifically in the services sector which saw pricing rising by 5.7% on year in May. Bailey underscored the cautious approach needed, acknowledging the return of inflation to the 2% target in May  The committee noted that “Indicators of short-term inflation expectations have also continued to moderate, particularly for households. CPI inflation is expected to rise slightly in the second half of this year, as declines in energy prices last year fall out of the annual comparison.”. Bailey stressed the need for sustained low inflation before considering any rate adjustments. Financial markets raised their expectations of a rate cut in August however, many believe a cut in September is more likely.

In other news the FTSE 100 closed the week higher, UK retail sales soared by 2.9% month-over-month in May 2024, recovering from an upwardly revised 1.8% decline in April and much higher than forecasts of a 1.5% gain; it is the biggest increase in four months. Sales volumes rose across most sectors with clothing retailers and furniture stores rebounding following poor weather in April.

The UK Composite PMI fell to 51.7 in June, down from 53.0 in May, below market expectations. The slowdown was primarily driven by a deceleration in the service sector, partly attributed to businesses pausing spending decisions ahead of the upcoming election. However, there is a silver lining: manufacturing conditions have improved, reaching a 23-month high. The slowdown in the economy could put pressure on policymakers to consider cuts to interest rates.

Looking at the Eurozone, stocks ended the week higher rebounding as worries about political uncertainty appeared to ebb and the outlook for monetary policy easing brightened. Data wise PMI fell to 50.8 in June of 2024 from 52.2 in the previous month, below market expectations, but enough to notch a fourth consecutive expansion in private economic activity. Readings above 50.0 signals expansion whilst below indicates contraction. Despite its slowdown, growth in services was enough to offset the deeper contraction for manufacturing which hit a 6-month low.

On Friday, US PMI data revealed a climb to 54.6 in June, marking its highest level in over two years, highlighting notable strength in the services sector. Payrolls in this sector increased at the fastest rate in five months, rebounding from a two-month decline. Additionally, selling price pressures in services were among the lowest since the pandemic began, offering a positive sign. However, services providers still faced higher wage bills, indicating ongoing pressure on operating margins.

Looking ahead, key data releases next week include US durable goods orders, final Q1 GDP figures, the Federal Reserve’s preferred measure of inflation and the Personal Consumption Expenditures (PCE) index. Japan will also release data on retail sales and industrial production.

Kate Mimnagh, Portfolio Economist

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