Week ending 28th June 2024.

As you can see from the accompanying table, markets were broadly lower this week.

UK markets struggled to gain traction despite economic data showing the British economy grew by 0.7% in Q1 2024, up from the initial 0.6% estimate. This marks the strongest expansion in over two years, ending last year’s recession. The services sector led the growth, with an estimated increase of 0.8%. The revised GDP figures indicate a stronger recovery, fuelling market optimism.

The UK general election is scheduled for Thursday, July 4th. Polls suggest the Labour party is likely to win, having maintained a strong lead over the Conservatives. A Labour majority is not expected to cause significant market disruption, as markets have had time to adjust to this possibility.

US stocks surged on Friday before closing lower. The release of May’s Core Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation increased by 0.1% from the previous month, slightly below April’s 0.2% rise. This modest uptick is seen as a sign that inflationary pressures are easing, bolstering traders’ hopes that the Fed might lower interest rates later this year. The 0.1% increase in the Core PCE price index marks the smallest monthly rise since November 2023, a slowdown from the 0.3% gains seen in the prior three months. Annually, core PCE inflation fell to 2.6% in May from 2.8% in April.

Personal income saw a 0.5% rise, outpacing personal spending, which grew by 0.2%. This disparity suggests that consumers still have the capacity to spend, despite diminishing savings accumulated during the COVID-19 pandemic. However, it raises questions about whether this increased saving is voluntary or a response to economic pressures.

The latest data indicates a cooling inflation environment. Should this trend continue, it could pave the way for potential interest rate cuts, providing a boost to market sentiment and economic growth.

There was positive news for the US banking sector this week as the Federal Reserve announced that all 31 large US banks passed its latest stress tests, staying above minimum capital requirements. This outcome potentially paves the way for these banks to return capital to shareholders through dividends and buybacks. Given the perceived banking crisis in March last year, the result of the stress tests provides reassurance that they can weather a financial storm.

European markets closed the week lower as investors took a cautious approach ahead of the first round of French parliamentary elections on Sunday. President Emmanuel Macron called for the elections following Marine Le Pen’s National Rally (RN) victory in the European elections. France’s National Rally, led by Marine Le Pen, has long challenged the political establishment but is now closer than ever to mainstream power. The party secured over a third of the vote in the first round of a snap election, positioning itself as France’s dominant political force. However, it’s uncertain if they can achieve a majority to form a government. The second round of voting is on July 7th.

Asia-Pacific markets experienced significant gains on Friday, buoyed by robust economic data from Japan. TOPIX closed up 3.1%. Japan’s retail sales grew more than expected in May, and other data releases showed inflation in Tokyo increased in June due to higher energy prices, with consumer prices excluding fresh food rising 2.1%, up from 1.9% in May. Industrial output also exceeded expectations in May, potentially prompting the Bank of Japan to consider an interest rate hike in July.

Next week, key data releases include manufacturing PMI from the US and China, Eurozone inflation, minutes from the Federal Reserve’s June meeting, US Nonfarm payrolls, and the unemployment rate. US markets will be closed on Thursday to mark the July 4th holiday.

Kate Mimnagh, Portfolio Economist

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