Week ending 31st May 2024.

Stocks mostly finished lower in the holiday-shortened week but ended the month with gains. This defied the “Sell in May and go away” adage, which refers to the seasonally weaker historical performance of stocks from May to October.

On Thursday, a week before the European Central Bank (ECB) meets to decide on interest rates, Eurozone unemployment hit a record low of 6.4% in April, below expectations. Fewer women were unemployed than in March (6.7% vs. 6.9%), and youth unemployment also declined. A positive signal for the region amidst a tight monetary policy environment.

However, higher-than-expected inflation data on Friday disappointed investors. Eurozone inflation unexpectedly rose to 2.6% on year in May, up from April’s 2.4% marking the first increase this year. Whilst markets had priced in a small uptick the rise came in above expectations dampening investors’ hopes for a swift shift in the ECB’s monetary policy.

The core inflation rate, which excludes the volatile energy and food sectors, also rose from 2.7% to 2.9% over the same period. This measure is closely watched as it provides a clearer picture of underlying price pressures in the economy.

Earlier this year, Europe appeared to be on a steady path towards the ECB’s 2% inflation target. This downward trajectory allowed ECB policymakers to hint at potential rate cuts. The unexpected inflation uptick may have put a spanner in the works for ECB policymakers.

Turning to the US, the highly anticipated core PCE inflation index held steady at 2.8% on year in May, unchanged from the previous month. This rate, the lowest since March 2021, remains above the Federal Reserve’s (Fed) target of 2%, presenting a nuanced challenge for policymakers. The core PCE index, which strips out the more volatile food and energy prices, is the Fed’s preferred measure for gauging underlying inflation trends. Despite a gradual decline from previous highs, core PCE inflation remains sticky.

In the first quarter of 2024, the US economy displayed signs of tempered growth, expanding at an annualised rate of 1.3%. This figure fell short of both the initial advance estimate of 1.6% and the 3.4% growth witnessed in Q4 2023. The primary contributor to this downward revision was a notable deceleration in consumer spending. The downward revision indicates that the US central bank’s strategy of tempering economic expansion through elevated interest rates is influencing consumer behaviour.

In May, China’s Manufacturing PMI dipped to 49.5 from April’s 50.4. This missed market expectations, which anticipated a reading of 50.5, and nudged the indicator just below the critical threshold of 50, signalling a shift into contractionary territory. However, China’s latest strategic move: the establishment of its third state-backed investment fund worth $47.5 billion is poised to inject fresh momentum into China’s semiconductor sector and provide a boost to the manufacturing sector.

Next week we have PMI data from Europe, the UK, and the US. European retail sales and ECB interest rate decisions were originally priced in a 25-basis point cut. However, some have pared back expectations given the uptick in inflation. Towards the end of the week, we can also expect Chinese trade data and US unemployment rates.

Kate Mimnagh, Portfolio Economist

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