Markets in a Minute: May 2024
We send regular communications to keep our clients abreast of what is happening in financial markets and activities that may be impacting their investments. Below is a snapshot of what happened in May markets.
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Markets in May
The story for markets continued to be global inflation, interest rate decisions, and economic growth. Investor hopes for falling interest rates shifted to Europe and the UK, with company valuations rising in anticipation of falling borrowing costs.
The US did not enjoy the same sentiments after Federal Reserve (Fed) members hinted they would once again push back their first interest rate cut due to stickier-than-expected inflation components.
Despite this, US equities extended their impressive bull run as companies began shaping up for another strong quarterly earnings season, reinforcing America’s economic resilience in the face of the Fed’s extraordinary rate tightening cycle.
UK economy continues to improve, with all eyes on the first interest rate cut
- The International Monetary Fund (IMF) raised the UK’s growth forecast for 2024, following its annual health check on the economy. It is now forecasting UK gross domestic product (GDP) will expand by 0.7% this year, up from the 0.5% forecast in April. The IMF still expects GDP growth of 1.5% next year, as “disinflation buoys real incomes and financial conditions ease”.
- UK inflation – as measured by the Consumer Prices Index (CPI) – slowed to an annual rate of 2.3% in April, down from 3.2% in March, helped by falling gas and electricity prices. Although a steep decline in relative terms, it marginally missed economist forecasts of a slowdown to 2.1%. However, it doesn’t change the trajectory of inflation falling below the Bank of England (BoE) 2% target in the coming months.
- The BoE’s Monetary Policy Committee resisted external pressures to cut interest rates from their current 16-year high, with a 7-2 vote in favour of leaving rates on hold at 5.25% for the sixth consecutive month. The two contrarian votes were to lower rates to 5%, supporting the idea of an imminent interest rate cut.
US economy shows signs of softening after impressive run
- US real (GDP) increased at an annualised rate of 1.3% in the first quarter of 2024, according to the second estimate from the Commerce Department. This was the equivalent of quarterly growth of just over 0.3%, a sharp fall compared to the previous quarter’s 3.4%.
- The slowdown was also evident in US consumer confidence, which fell sharply in May, according to the University of Michigan’s consumer sentiment index. The index dropped to 69.1 for May, down from April’s 77.2. This was far worse than expected, which added to recent signs that the US economy was softening. The largest contributor to the fall was mounting concerns over rising unemployment and slowing wages.
- The US personal consumption expenditures (PCE) price index increased 0.3% month-on-month in April, which was 2.7% higher than a year ago, according to the US Commerce Department. Core PCE, the Fed’s preferred inflation measure, increased 0.2% in April – marking a fall against the previous two months of a consecutive 0.3% rise.
- Concerns over the ‘stickiness’ in US inflation persist, as shown by a hotter-than-expected Producer Prices Index (PPI) number. Services sector companies and manufacturers raised the cost of their goods and services by 0.5% in April, according to the US Bureau of Labor Statistics, following a 0.1% drop in March. This could discourage the Fed from cutting interest rates too soon.
Eurozone inflation ticks upward, without shifting rate cut expectations
- Investors still expect the European Central Bank (ECB) to cut interest rates soon, despite the recent flare-up in consumer prices. Eurozone CPI inflation increased to 2.6% year-on-year in May, from 2.4% in April. Core inflation, which removes the volatile effects of food, energy, alcohol and tobacco, increased to 2.9% in May, reversing the fall to 2.7% in April.
- Data provider Eurostat confirmed the Eurozone emerged from its technical recession in Q1, with a GDP increase of 0.3% from January to March. This was in line with its flash estimate published last month and follows two quarters in which the region shrank by 0.1%.
- The underlying strength of the Eurozone was evident in May’s purchasing managers index (PMI) surveys, which indicated Eurozone companies were expanding at the fastest rate in 12 months. Business activity, employment, and new orders all grew more quickly in May. This lifted the HCOB Flash Eurozone Composite PMI from 51.7 in April to 52.3 in May, with any reading over 50 representing economic expansion.
- Although markets expect an interest rate cut from the ECB, the cut is likely to be just 0.25%, taking the ECB’s refinancing, deposit and marginal funding rates to 4.25%, 3.75% and 4.50%, respectively.
In summary
Green shoots of optimism continued to grow in the UK and Europe, spurred by decelerating inflation and expected interest rate reductions. This economic trend was most supportive for smaller to mid-sized (SMID) companies, whose valuations had already fallen to compelling lows. For the UK in particular, the surge in takeover activity and merger and acquisitions (M&A) is a testament to the attractive relative value on offer for investors and could be further supportive for UK assets. For the US, it remains uncertain as to whether equity markets can extend their impressive run and much will depend on whether corporate earnings meet expectations.
May was a challenging month for bond markets as investors digested US rates could remain higher for longer. Ten-year US Treasury prices fell, with yields having initially fallen at the start of May to remaining near the year-to-date peak of 4.6%. In the UK, ten-year Gilts followed suit after yields fell at the start of the month and sharply rising to close at 4.40%. It appears bonds could likely tread water until central banks make their move and cut interest rates.
As always, we continue to work closely with our investment partners to review and ensure funds and their performance are best placed to meet your long-term financial objectives.