Monthly Comment: An aura of positivity across many markets
May was a month of positivity for global markets, with key indices closing at a high and the MSCI AC World Index reporting a notable 2.3% increase compared to April.
US Markets: Tech Sector Leads the Charge
US equities, especially those in the tech sector, were standout performers. NVIDIA, a frontrunner in AI chip manufacturing, saw its shares soar by over 9% following an impressive first-quarter earnings report that revealed a 262% revenue increase and an upcoming 10-for-1 stock split. This announcement underscored NVIDIA’s robust financial health and significantly boosted the earnings-per-share of US large caps.
The US Consumer Price Index hinted at a potential easing of inflation rates earlier in May. This led to a 1.6% rise in US equities, lifting the year-to-date figures to 11.8%. A historic milestone was achieved when the Industrial Average surpassed the 40,000 mark for the first time. Following this data, US market indicators remained positive, with the MSCI North America up by 2.9% and US Treasuries increasing by 1.5%.
UK Markets: Strong Rebound After Recession
In the UK, markets rebounded strongly after a brief recession in late 2023. The UK economy reported an impressive 0.6% growth in the first quarter of 2024, outperforming all other G7 economies. The UK market's performance was robust, with the MSCI UK index up by 1.9% and UK Gilts yielding positive returns.
Global Rate Cut Expectations: A Cautious Outlook
May was marked by cautious optimism in the financial markets, with the Federal Reserve, the Bank of England, and the European Central Bank (ECB) all closely monitoring potential rate adjustments.
The Federal Reserve: Inflation Trends Under Watch
The US Personal Consumption Expenditures (PCE) Price Index for April indicated persistent inflation pressures, though core measures suggested a slight easing. The PCE Price Index rose by 0.3% during the month, maintaining the previous steady inflation rate. The core PCE Price Index, which excludes volatile food and energy sectors, increased by a modest 0.2%, hinting at a potential softening in underlying inflationary trends.
The core PCE also saw a year-over-year rise of 2.8%, aligning with expectations. This modest improvement in core PCE offers a hint of optimism, but the overall persistence of inflation suggests the Federal Reserve may continue to be cautious with monetary policy. Federal Reserve Chair Jerome Powell indicated that gaining confidence in inflation progress for rate cuts “will take longer than previously expected,” referencing the Fed’s earlier projections of three rate cuts in 2024.
The Bank of England: Adjusting Expectations
In the UK, April’s consumer price growth decelerated to 2.3%, the lowest in nearly three years, and slightly higher than the 2.1% prediction. This slower-than-expected decrease led to a recalibration of expectations for a midyear rate cut by the Bank of England. With core inflation at 3.9%, financial markets are considering the likelihood of a single 25 basis point rate cut this year, adjusting from the previously anticipated two cuts.
The European Central Bank: Potential First Rate Cut in Eight Years
The European Central Bank is expected to announce its first interest rate reduction in eight years, likely decreasing by 0.25 percentage points to 4.25%. This anticipated move comes despite a recent uptick in eurozone consumer prices, which had previously been hovering around the bank’s 2% target.
Both headline and core inflation figures for May exceeded projections, marking the first month-on-month acceleration of the year. Market expectations for EU interest rate cuts in 2024 have been scaled back to less than 0.6%, suggesting two potential cuts with a third being a possibility.
Early General Election in the UK: Market Response
In light of the unexpected announcement of an early general election set for Thursday 4 July, the UK financial markets have shown a remarkably calm response. Despite the potential for political upheaval, indicators such as sterling, the 10-year gilt yield, and the large cap markets have all experienced minimal fluctuations.
This subdued market reaction can be attributed to a combination of factors: the markets’ growing resilience to political events and the absence of drastic fiscal policy changes proposed by the major political parties, largely due to inflation’s impact on public spending. Consequently, the markets have maintained a ‘business as usual’ stance amidst the election news.
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