Weekly comment: Encouraging figures in the US

Market overview – Richard Carter, Head of Fixed Interest Research

Last week marked another positive trend for worldwide stock markets, as evidenced by the 1.7% rise in the MSCI All Country World Index, propelling its year-to-date (YTD) gains to 10.3%.

The highlight of the week was the performance of US markets. Following encouraging figures from the US Consumer Price Index which pointed to an easing of inflation, US equities surged, leading to a 1.6% increase in stocks and elevating the YTD figures to 11.8%. A notable achievement was the Industrial Average breaking past the 40,000 threshold for the very first time.

Growth stocks led the rally, buoyed by diminishing worries over inflation and interest rates. The Growth Index advanced by 1.8%, surpassing the large lap value index’s 1.3% rise and matching the mid cap index’s 1.8% gain. Their YTD performances now stand at 13.3%, 8.9%, and 3.9% respectively, with small-caps outshining large-caps, indicative of a reduced implied discount on future earnings.

European markets saw a modest rise, with the index up by 0.6% (10.5% YTD). Despite this, European Central Bank (ECB) officials advised caution, tempering the anticipation for a more lenient monetary policy. The ECB hinted at a possible rate cut in June but cast doubts on subsequent aggressive cuts. In particular, board member Isabel Schnabel emphasised the dangers of hasty easing, remarking, “a front-loading of the easing process would come with a risk of easing prematurely.” Nevertheless, the euro experienced an uptick, finishing the week at USD 1.09 for EUR.

In the UK, the large cap index inched up by 0.1% (10.8% YTD), while the mid cap index rose by 0.6% (6.8% YTD). The British pound strengthened, ending the week at USD 1.27 for GBP.

Japanese stocks closed the week positively, with the large cap index up by 0.6% (17.3% YTD). Despite economic softness and a stable yen, the Bank of Japan’s slight tilt towards hawkishness resulted in a modest uptick in Japanese Government Bond yields.

US inflation easing?

Investors were greeted with encouraging news last week, as the US Consumer Price Index (CPI) – a key gauge on inflation – matched expectations with its latest figures.

On Wednesday, the Labor Department reported a 3.4% rise in the CPI for April, a slight decrease from the 3.5% in March, and its first annual deceleration since January.

These CPI figures followed the Labor Department's announcement that the U.S. economy added 175,000 jobs in April, falling short of the 240,000 jobs economists had expected. Additionally, U.S. wages saw a 3.9% annual increase, while the unemployment rate ticked up to 3.9%.

Additionally, unexpected data showed that US retail sales remained unchanged, food prices remained steady over the month and saw a 2.2% annual increase, and the shelter CPI – which significantly influences core inflation – was up by 5.5% from the previous year.

This data suggests that US inflation is moving in the right direction. Reacting to the news, Wall Street stock markets reached new heights as investors anticipated quicker interest rate cuts by the Federal Reserve.

Money markets now suggest over a 55% likelihood of the Federal Reserve announcing an initial rate cut by September, with expectations firmly set for a move by the subsequent meeting in November. The market is also factoring in the possibility of two rate cuts by the Fed before the year’s end, a notable increase from the single cut anticipated just a day prior.

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