The UK's FTSE 100 share index soared to a record high amid signs of economic improvement.
The FTSE 100 hit an all-time high in April, driven by expectations of UK interest rate cuts and reduced tensions in the Middle East. Optimism was also fuelled by signs of improvement in the UK economy, including lower inflation and a return to growth after a brief recession at the end of 2023.
UK inflation dropped from 3.4% in February to 3.2% in the year leading up to March, its lowest level in two-and-a-half years. Some predict a significant fall in the next inflation report due to lower energy prices compared with the previous year. These figures bring inflation closer to the Bank of England's target of 2%, as it considers when to potentially start cutting rates. The Bank has hiked interest rates to a 15-year high of 5.25%. With inflation proving to be stickier than expected, the Bank could push interest rate cuts further down the line.
The UK economy saw modest growth in February, suggesting a possible exit from recession. GDP increased by 0.1%, mainly due to manufacturing production, following 0.3% growth in January. The economy contracted in the third and fourth quarters of 2023, putting the UK in a technical recession.
However, there are signs the job market is cooling, with a slight rise in unemployment and a decrease in job vacancies. The unemployment rate climbed from 3.9% to 4.2% between December and February, the highest in six months. Despite this, regular pay growth (excluding bonuses) was stronger than expected, reaching 6% in the three months up to February.
US inflation rises
Bond and share prices dipped after US inflation increased to 3.5% in March, up from 3.2% in February. This unexpected rise in inflation could reduce the likelihood of a rate cut by the US Federal Reserve (Fed) this summer. Additionally, with the inflation outlook worsening, consumer sentiment slightly declined in March.
Despite a slowdown in US GDP growth to 1.6% in the first quarter, the economy remains strong. In March, US employers added 303,000 jobs, and the unemployment rate dipped to 3.8%. The red-hot labour market could make the chance of rate cuts less likely if it pushes up wage growth, which would translate to higher consumer inflation. Furthermore, US retail sales surpassed expectations in March, providing more evidence of a solid end to the first quarter for the economy.
Fed chair Jerome Powell cautioned that persistently elevated inflation will probably delay any interest rate cuts until later this year. Core inflation, which excludes volatile food and energy, also rose sharply for a third straight month.
ECB might lower rates by summer
In March, euro area inflation dropped from 2.6% to 2.4%, raising expectations of an interest rate cut by the European Central Bank (ECB). European markets ended higher after the ECB kept interest rates steady at 4% and hinted at possible rate cuts if upcoming forecasts indicate easing inflation pressures.
The region's average inflation rate has fallen from a 2022 peak of 10.6% and is close to the central bank’s goal. Despite stronger than expected US inflation data and uncertainty over the Fed’s next move, the ECB has given strong signals that cuts are still on the way.
The euro area economy is gradually recovering from its downturn, with business activity picking up speed, especially in services, marking the fastest expansion in nearly a year. Although manufacturing still contracted, the private sector's economic activity in Europe bounced back in April.
The Eurozone Composite PMI Output Index rose to 51.4 from 50.3 in April – its highest level in 11 months. The German private sector also saw a return to growth, while the French economy stabilised.
China’s recovery gains momentum
China’s economy grew faster than expected at the beginning of the year, despite the deepening property crisis. GDP expanded by 5.3% in the first quarter, showing the economy's recovery from the pandemic is gaining momentum. Industrial production rose by 6.1% compared with last year, and retail sales increased by 4.7%.
Over the same period, property investment fell by 9.5% compared with a year earlier, highlighting the problems the industry still faces. The sector – which accounts for around 20% of the economy – remains sluggish due to debt issues despite a flurry of government measures to boost the industry. New home prices also fell at the fastest pace for more than eight years in March.
China's exports fell by 7.5% compared with the previous year, along with a fall in imports. Consumer prices also rose slightly by 0.1% in March, highlighting the challenges the government faces in boosting domestic demand.
China’s economy has stalled in recent years, hit hard by stringent Covid controls, a crisis in the debt-laden property sector and weaker global demand. As a result, the government is trying to move its economy away from real estate towards high end manufacturing.