This Thursday the Monetary Policy Committee (MPC) met to discuss interest rates and as expected there was a majority vote to keep rates unchanged at 5.25%. Over the course of this year, market expectations for rate cuts have been reduced but there is still the belief a rate cut could occur this summer.
The UK base rate has been held firm for the sixth meeting in a row, however investors were upbeat following Governor Bailey’s comments. He didn’t rule out rate cuts in next month’s meeting and mentioned that rates could possibly be cut by more than market expectations. Ahead of the June meeting, UK inflation data and wage data will be released arming the MPC to make fresh judgement on the state of the UK economy.
Positive news continues to flow out of the UK as this morning it was confirmed that the UK had exited recession. UK GDP for Q1 came in at 0.6% beating market expectation of 0.4%, ending the shallow recession that it entered in the second half of 2023. There has been renewed strength in sectors such as retail, public transport and health, especially as we have seen a reduction in strikes. Sterling has risen on the good news up to $1.257.
In Germany, industrial output was disappointing over the month of March. Industrial production fell by 0.4% although it was a smaller decline than market expectation of 0.6%. Germany has long been Europe’s leading manufacturing hub and with 40% of manufacturing companies reporting a lack of orders over April we know the road for recovery of Germany’s economy remains long.
On Tuesday, Bank of Japan (BoJ) Governor, Mr Ueda, mentioned actions regarding the currency was a key topic in a meeting with Prime Minster Kishida. The Japan Yen has been sliding for more than three years, losing more than a third of its value since 2021, reaching levels last seen in the 1990’s. The weak Yen is hampering Japan’s economy with increased import costs, added inflationary pressures and squeezing households’ income.
Sweden’s central bank, Riksbank, has stepped out and made their first rate cut since 2016. After raising rates up to 4%, they have now cut rates by 25bps to 3.75% and are expected to continue to cut rates twice more this year. The Riksbank have said they are proceeding cautiously and don’t want to be out of sync with the European Central Bank or the US Federal Reserve. It is expected that they will pause rates at their next June meeting to assess the impact before continuing on their rate cut journey. The rate cut this week was seen as necessary as Sweden’s economy has remained weak over Q1 24 and households are continuing to feel the strain of higher costs. Sweden’s housing market has been under pressure due to higher rates as many homeowners have variable mortgages which have risen steeply as rates have been hiked to 4%.
In the US, weekly jobless claims rose to 231,000, much greater than market expectation of 210,000. This is the highest level of American’s filing for unemployment benefits in the last eight months and shows the US labour market is slowly cooling. This follows on from last week’s Non-farm payrolls report which showed the economy added the fewest jobs over the last six months. This will be positive news for the US Federal Reserve as they ponder on the right time to make their first rate cut. US equities have responded positively as the S&P500 is now up 1.7% for the week.
The positive momentum in May carried on this week with global equities pushing higher. UK equities, a perennial laggard over recent years, have sprung to life with the large cap index making new highs throughout the week. The mid and small cap indices are also beginning to move, albeit still someway off 2021 highs. US inflation data will be the key area of focus next week, and if there is evidence of progress in the battle against inflation then asset markets could continue to push on higher.
Nathan Amaning, Investment Analyst
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