A busy week in markets was made even busier by the news over the weekend regarding the attempted assassination of Donald Trump. The incident appeared to galvanise the Republican party and have increased Trump’s chances of returning to the White House. President Biden has recently been taken ill with COVID and there are rumours circulating that he may imminently drop out and be replaced as the Democrat candidate.
Taylor Swift and Burna Boy are musicians that have come to the UK over the month of June and have been cited as reasons for UK inflation coming in slightly higher than expected. The concerts have boosted demand for hotels and restaurants, leading to an increase in prices. For the restaurants and hotels and of course the Swifties there is more good news – Taylor Swift will be in London in August!
Markets had been optimistic about the UK’s inflation print for June with 1.9% forecasted, however headline inflation remained at 2%. Core inflation (excludes food and energy prices) was unchanged at 3.5%. With the Bank of England’s (BoE) target rate set at 2%, inflation is now in line with target, however investors have reduced bets on the BoE cutting interest rates in their August meeting. Services inflation is a key component that the monetary policy committee members are keen to see fall, and it also remained strong at 5.7%, despite market forecasts of a slight fall to 5.6%.
Later in the week, UK unemployment for May stayed firm at 4.4%, however wage growth for May (including bonuses) fell slightly to 5.7%, in line with market expectations. The BoE have spoken and want to see wages moderate, and the labour market continue to cool before they entertain an interest rate cut and it seems May’s figures were not significant enough to sway this vote.
We’ve had a busy week on the inflation front as the Eurozone figures for June were finalised. Core inflation (year-on-year) was unmoved at 2.9% and headline inflation slightly dropped to 2.5%. The Eurozone’s road to the 2% target could take some time, with investors not expecting it to be reached until late 2025.
Following the inflation data, the European Central Bank (ECB) met for the fifth time this year and the conclusion of the meeting was no surprise to markets, interest rates were held firm at 4.25%. The ECB cut rates by 25bps in the June meeting and the bank seem to be cautious on making any “rushed” decisions given the stalling disinflation. “What we do in September is wide open” said President Christine Lagarde, but it is tough to estimate what will occur as an abundance of economic data, two monthly inflation prints and quarterly figures on GDP and wages will be released before policymakers meet again. Investors however have begun to price in two further rate cuts for the year.
In the US, retail sales for June (month-on-month) were flat at 0%, following May’s figure being revised to 0.3%. Subsequent to the strong start to the year for retail sales, they have now significantly cooled as households continue to feel the pinch of stubborn inflation and elevated interest rates. PepsiCo, the drinks manufacturer, announced they have seen a trend in lower income households seeking alternatives which affected their second quarter revenue results.
UK retail sales disappointed this morning, declining by -1.2% month-on-month. Wet weather in June could have been a contributory factor, along with high interest rates. As time goes by more consumers will be re-mortgaging to higher levels and this will naturally curb consumer spending in other areas of the economy.
It has been a fascinating week in markets, with big rotations occurring in equities. The first real concerns around the artificial intelligence (AI) theme surfaced this week. On the back of concerns around user application, future revenues and possible Trump tariffs we witnessed big reversals in previous market leaders. Dutch chip equipment maker ASML fell over 12% on Wednesday, while other AI darlings such as Nvidia fell over 6% on the day.
The summer months are historically quiet in markets, with the holiday period leading to low trading volumes and limited activity. However, the current period feels anything but quiet, and with interest rate cuts appearing imminent it is unlikely to quieten down anytime soon! We will be keeping a close eye on events, aiming to ensure portfolios are well placed to blossom over the summer months.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.