Last week was a relatively quiet one for markets with global equities gaining 1.4% and 1.1% in local currency and sterling terms respectively. With the exception of Japan which was down 1.8%, all the major markets were up 1-2%. Fixed income was mixed with UK gilts returning 0.4% but US Treasuries down 0.5% on the back of an uptick in yields.
The vitriolic spat between Trump and Musk may have grabbed the headlines but had little impact on anything other than the Tesla share price which ended the week down 15%.
Rather more important for markets was the first set of US economic data for May. Business confidence came in weaker than expected with manufacturing sentiment remaining in recession territory and sentiment also weakening in the services sector.
However, the more important payroll numbers on Friday provided some relief. While a slightly larger than forecast gain in May was more than offset by downward revisions to previous months, the picture remains one of continued employment growth, albeit at a considerably reduced pace from last year. The unemployment rate was also unchanged at a comparatively low 4.2%.
All said and done, there was nothing in the figures suggesting the US is heading into a recession rather than just seeing a marked slowdown in growth. The numbers may have provoked Trump to call for a full 1% cut in interest rates but the reality is that they will merely encourage the Fed to stick to its stance that there is no immediate need for a change in policy.
The market has duly scaled back a little its hopes for US rate cuts. It still sees the Fed cutting rates by 0.25% in September but is now less convinced that this will be followed up by another reduction in December.
Last week made pleasant reading regarding the state of the Eurozone economy. GDP growth was unexpectedly revised up in the first quarter to a healthy 2.4% annualised pace and inflation surprised on the downside in May. The core inflation rate slowed to 2.3% while the headline rate fell to 1.9%.
Meanwhile, the European Central Bank cut rates by a further 0.25% as expected. Whereas the Fed and Bank of England have both reduced rates by a cumulative 1% from their high last year, the ECB has lowered rates by double that amount.
Rates in the Eurozone are now down to 2.0% and back around their neutral level whereas monetary policy in the UK and US remains restrictive. The ECB believes it is now in a good position to navigate the economic uncertainties and further cuts look likely to be gradual and limited to no more than 0.25-0.5%.
Rates were also reduced in India last week and by a larger than anticipated 0.5% to 5.5%. A lower inflation forecast allowed the central bank to step up its action to support growth in the face of the uncertainties caused by a potential 26% tariff on exports to the US from July.
There is never a week nowadays without some tariff news and last week was no exception. After berating China for violating the 90-day trade truce the previous week, last week saw news that following a ‘very good’ call between Trump and Xi, a new round of US-China trade talks would start shortly.
This coming week, US inflation figures should be the macro highlight for the markets and are forecast to show core and headline inflation edging up in May to 2.9% and 2.5% respectively as the tariff hikes start to feed through.
Here in the UK, the Chancellor’s spending review on Wednesday will be the centre of attention but with the overall spending parameters already set, this will only be significant for markets to the extent it highlights the strains on the public finances. Tuesday and Thursday also see the release of the UK labour market and GDP numbers for April.
Rupert Thompson – Chief Economist