Inflation remains the market’s main act
| UK Stock | US Stocks | EU Stocks | Global Stocks | EM Stocks | Japan Stocks | Gilts | GBP/USD |
| -1.2% | +1.9% | -3.0% | +0.8% | +0.9% | -0.5% | +1.6% | -0.3% |
| all returns in GBP to Friday close | |||||||
Global markets ended +0.8% up last week, with varying results from different regions. US stocks were the strongest performers, rising +1.9% over the week as US CPI inflation came in lower than expected. The rally was a narrow one, with information technology stocks rising +6%, far outpacing other sectors. UK and EU stocks fared worse, falling -1.2% and -3.0% respectively, seemingly in reaction to the results of EU parliament elections over the previous weekend.
Bond yields fell across the board in reaction to the news of softer than expected US inflation. 10 year government bond yields fell by 21 basis points in the US, 20 basis points in the UK and 25 basis points in Germany.
Commodities outperformed stocks and bonds over the week, as gold rose by +2% and oil rose by +4.1%.
US inflation came in lower than expected in May. Headline inflation was 3.3% year-on-year, below expectations for a 3.4% rate. Core inflation was also softer than expected, at a rate of 3.4% versus 3.5% expected. Over the month of May, a fall in gasoline was the largest contributor to weaker headline inflation, while falling prices for new vehicles, transportation services and apparel contributed to the decline in core inflation. Stocks and bonds rallied following the release of the data.
The Federal Reserve held rates steady at its policy rate meeting, which occurred six hours following the release of inflation data. While the decision was consistent with what markets had expected, economic projections released by the Fed revealed that policymakers had revised up their expectation for the year end Federal Funds rate to 5.1%, from 4.6% in March, suggesting only one rate cut in 2024 instead of two. US markets appeared relatively unnerved by this revelation, as tech stocks continued to rally over the rest of the week, while the broad index traded sideways.
The UK unemployment rate increased to 4.4% in March, from 4.3% in the previous month. The rate is the highest since September 2021. Vacancy data showed that employers cut back on hiring between March and May, while wage data showed that average weekly earnings increased at a rate of 5.9%, versus analyst expectations of 5.7%.
After the Fed’s Dot Plot surprise in December, markets moved fast to price in several rate cuts in 2024. Perhaps a bit too fast? The jury is still out, with the debate raging as to whether the US Federal Reserve will lower interest rates as fast as the markets anticipate (six times this year) or less. I feel compelled to state three obvious points.
“Countries don’t go bust”, Walter Wriston, Citibank’s president (1967-1984) famously said. Debt defaults are a complex political and social calculation and when they do happen, it is way before a country runs out of natural resources. Yet, of all the economic risks in the next few years, none may be as consequential as the accumulation of debt.
Global equity and bond markets enter 2024 with significant momentum from the last two months of 2023 fuelled by falling inflation and subsequent dovish projections from the US Federal Reserve.
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