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26 Jun 2024 | 5 minutes to read
Last week’s economics data held more favourable news than had been expected. Firstly, on Wednesday, it was revealed that inflation as measured by the Consumer Prices Index (CPI) slowed below 2% in May, to 1.99%. This drop was in line with consensus expectations, although it was marginally ahead of the central Bank’s own forecast.
Looking within the print, month-on-month prices remain strongest across hospitality, transport and communications. The continued resilience of hospitality pricing may speak to ongoing tightness in the labour market, however transport and communications pricing has more to do with regulated price increases.
While services pricing remains strong at 5.6% year-on-year, goods prices are now firmly in disinflationary territory, falling -1.3% year-on-year.
And secondly, on Thursday 20 June, the Bank of England’s (BoE) Monetary Policy Committee left policy interest rates unchanged, but acknowledged a dovish divide within committee members.
Although the committee’s vote pattern remained unchanged, with two votes for a 25bps cut and seven to hold, there were two camps within the “hold” contingent. Some members worried about stronger than expected data, noting that: “the return of headline inflation to 2%...was not necessarily indicative of the required sustained return to target”, and arguing that “indicators of domestic demand were stronger than had been expected, and the risks to the outlook for activity were skewed to the upside.” Other members were more relaxed however, stating: “the upside news in services price inflation relative to the May Report did not alter significantly the disinflationary trajectory that the economy was on”. Crucially, for these members, “the policy decision at this meeting was finely balanced”, suggesting more members will support a cut at the next meeting.
Combined, these two factors have pulled futures pricing of a first rate cut forward, with futures indicating a 93% chance of a September cut, compared to the week prior when November was priced in. A key question is whether August is now back in play. At the time of the May Monetary Policy Report, futures markets indicated a first cut in August, with the BoE forecast, predicated on this, indicating inflation would be below 2% at the end of the forecast on this basis. The new forecast is likely to be predicated on cuts beginning later, so unless the new forecast sees CPI significantly below 2% in the new forecast, the BoE are likely to wait.
US data remains in the spotlight. May’s retail sales came in on the soft side, rising by just 0.1% month-on-month, while the March and April prints were also revised lower. Building materials and food services spending both contracted. Overall, consumption spending is expected to slow modestly further this year, but not to collapse.
US housing activity also looks to be softening, against a backdrop of still elevated interest rates. May housing starts fell -5.5% month-on-month, and permits -3.8%. In manufacturing, the Philadelphia Fed manufacturing Index fell in June, signaling softness in the sector as well.
In contrast, initial jobless claims fell back last week, having delivered a large gain in the week prior. Claims came in at 238,000, a 5,000 drop. However, seasonal volatility makes it difficult to form any firm conclusions from this data series.
Overall, US data shows a gradual slowing trend, though the economy is not in collapse. This makes rate cuts this year likely.
Tech stocks continue to be in focus, with chip maker Nvidia on a particularly wild ride.
The firm briefly became the world’s most valuable company, with its market capitalisation topping $3trn, making it larger than Apple or Microsoft. However, this was short-lived, and the stock fell some 13% in subsequent days.
This move was echoed in the share price moves of other chip makers. Such companies are expected to benefit from the growing demand for chips needed to fuel the rollout of artificial intelligence products, and the sector has performed well in recent years, as investors have factored in significantly higher demand. However, with prices having risen so considerably, investors may be incentivised to lock in gains.
In the case of Nvidia, its next-gen AI chip, Blackwell, may provide a further catalyst for growth.
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