July monthly market update - Reflections on June

The Bank of England maintained interest rates at 5.25%, despite inflation reaching its 2% target.

London stocks climbed as the Bank of England kept interest rates steady at 5.25%, a 16-year high, despite inflation falling to the 2% target. Although overall price rises have slowed, services inflation – a key metric followed by the Bank – was higher than expected at 5.7%.

With economic growth, wage expansion and services inflation all coming in higher than expected, analysts believe the first interest rate cut may not come until September.

The UK job market showed signs of weakness with an unexpected increase in the unemployment rate to 4.4% for the three months to April, the highest since September 2021. However, wage growth stayed strong at 6%, outpacing inflation. The UK economy saw no growth in April, partly due to bad weather affecting shopping and construction activities.

GDP was flat during the month following growth of 0.4% in March. It comes after growth of 0.6% in the first quarter, ending the recession from the final half of last year. UK retail sales rebounded in May after bad weather in April saw a slump in high-street spending. Retail sales volumes rose by 2.9% in May 2024, following a fall of 1.8% in April.

US stocks soar

US indexes rose due to excitement over artificial intelligence in the tech sector and falling inflation, raising hopes for rate cuts.

The US Federal Reserve (Fed) indicated it will cut rates just once this year, even though inflation dropped from 3.4% to 3.3% in May. The Fed held interest rates steady at 5.25% to 5.5%, where they have been for nearly a year. In March, the Fed predicted it would reduce rates three times in 2024.

The lower inflation numbers are good news for President Joe Biden ahead of the November election. Price growth has fallen dramatically since rising to more than 9% two years ago following the economic fallout after the Covid-19 pandemic. However, many Americans are still feeling the pinch, with inflation not coming down as much as policymakers had hoped.

The US economy remains strong despite high interest rates, adding 272,000 jobs in May, far exceeding expectations. However, unemployment rose slightly to 4%.

Consumer spending showed signs of slowing, with retail sales increasing by only 0.1% in May. The trend in sales growth has been slowing as higher prices and interest rates force consumers to cut back.

ECB cuts rates

European stocks fell after French President Emmanuel Macron called a snap election, following a surge in support for the far-right in the 2024 European Parliament election.

Meanwhile, the European Central Bank (ECB) reduced interest rates for the first time in nearly five years, diverging from the Fed and the Bank of England as inflation begins to decline. The benchmark rate was lowered to 3.75% from a record high of 4%, where it had been since last September.

The move will bring relief to consumers and businesses who have seen rapid interest rate rises since the pandemic. ECB president, Christine Lagarde, said the central bank was confident that if inflation continued its longer-term downward trajectory, interest rates would continue to fall.

Consumer prices in the euro area rose by 2.6% year-on-year in May, up from 2.4% in April, marking the first month-on-month increase of 2024. Core inflation, excluding energy and food costs, also climbed to 2.9%, from 2.7% in April. Despite high interest rates, the labour market remains robust. The unemployment fell to a record low of 6.4% in April, down from 6.5% in March.

The region's economy is slowly starting to recover after more than a year of near stagnation. The 20-nation euro area bounced back from recession at the start of the year after a stronger than expected performance from Germany, France, Italy and Spain.

China's exports and retail sales rise

China's exports and retail sales increased for the second consecutive month, providing a boost to the economy despite rising trade tensions.

Exports rose 7.6% in dollar terms from a year earlier, while imports increased 1.8%. Retail sales increased 3.7% in May, accelerating from a 2.3% rise in April, but other sectors of the economy painted a less optimistic picture.

House prices in China experienced their biggest fall in over a decade, despite government support measures. Prices in 70 cities fell by 0.7% in May from April, the steepest month-on-month drop since October 2014.

The fall comes despite attempts by the government to revive the sector with measures such as scrapping minimum rate of interest and reduced down-payment ratios.

The property sector remains weighed down by weak housing demand, with real estate investment falling 10.1% year-on-year in the first five months of the year. Industrial output also lost some momentum, growing 5.6% in May from a year ago, compared to April’s 6.7% increase. Fixed asset investment also missed expectations.

The influx of cheap Chinese goods in the global market has concerned China's trade partners. The US has announced a tariff increase on Chinese electric vehicles (EVs), advanced batteries, solar cells, steel, aluminium and medical equipment. Europe also plans to impose import tariffs on EVs.