US stocks had gotten off to a poor start to the week, with the Dow Jones Industrial Average snapping an eight-day winning streak. However, stocks managed to pick up following the release of the consumer price index on Wednesday. Inflation, having come in hotter-than-expected for the previous months, matched expectations, with core CPI climbing 3.6% annually, the slowest pace since April 2021. The readings reaffirmed the soft landing scenario and revived hopes that the Federal Reserve will begin cutting interest rates later this year, helping to benefit growth stocks. Meanwhile easing inflation pushed Treasury yields lower.
On Thursday the Dow Jones crossed the 40,000 mark for the first time and managed to close above it on Friday, seeing a weekly advance of 1.2%. The S&P 500 rose 1.5% and the Nasdaq Composite was up 2.1%, both reaching fresh highs over the week. Aside from the inflation focus, another notable occurrence was meme stocks springing back into life on the return of “Roaring Kitty” to social media platform X. However, unlike the 2021 phenomenon gains were relatively short-lived, with GameStop also pressured after it announced that it would sell up to 45 million shares.
The pan-European STOXX 600 had been on a nine-session winning streak, rising to fresh highs, supported by solid company earnings, however the run ended on Thursday with investors pausing and reassessing the outlook for monetary policy. Nevertheless, the index was 0.4% higher for the week. The European Central Bank is widely expected to hike rates at its June meeting although there was a degree of caution, as board member Isabel Schnabel warned that back-to-back cuts did not seem warranted. The FTSE 100 ended slightly lower, snapping a three-week winning streak.
In Japan, the Nikkei 225 gained 1.5% for the week, even with disappointing GDP figures. For the first quarter the Japanese economy contracted 2%, worse than expected. Meanwhile the yen ended little changed against the US dollar on hopes of a reduction in the interest rate differential. The Hang Seng index jumped over 3% however on the mainland the Shanghai Composite ended roughly flat with mixed economic data. This was despite Friday’s announcement of measures aimed at supporting the troubled property sector. These included the People’s Bank of China scrapping a floor on mortgage rates as well as reducing the minimum down payment ratio.
Weekly macro highlights
US CPI inflation declines in April
US headline CPI inflation rose 0.3% month-on-month (MoM) in April according to data published by the Bureau of Labor Statistics. The data was below March’s 0.4% MoM inflation print, which markets had expected to be repeated in April. In year-on-year (YoY) terms, headline inflation rose 3.4%, a smaller increase than the 3.5% registered in March. The shelter and gasoline indexes rose 0.4% and 2.8% MoM respectively, contributing over 70% of the monthly increase in headline inflation. The energy index, which includes gasoline prices, rose 1.1% MoM in April as declining utility gas service prices fell 2.9% and partially offset the increase in gasoline prices. Food prices were unchanged on the month, with a 0.2% drop in prices of food at home offsetting a 0.3% increase in prices of food away from home. Excluding food and energy, core CPI inflation rose 0.3% MoM in April, contributing to a 3.6% YoY increase.
Japan’s GDP contracts in Q1
Japan’s GDP fell 0.5% quarter-on-quarter (QoQ) in Q1 according to preliminary data released by the Cabinet Office. The data was below Q4 2023’s 0.0% growth, which was revised down from the previously reported 0.1% QoQ expansion, and below market expectations for a smaller decline of 0.4%. Q1’s contraction was driven by a 0.5% QoQ decline in private demand, with household consumption falling 0.7% QoQ and marking the fourth consecutive quarter of negative growth. Business investment fell 0.8% QoQ in Q1, though the data may have been impacted by the closure of four car production factories due to allegations they falsified safety tests. With the factories having reopened in May, a rebound in Q2 is possible. The weakness in private demand was partially offset by stronger public demand in Q1, with government spending and public investment rising 0.2% and 3.1% QoQ respectively. Exports fell 5.0% QoQ, making the largest individual negative contribution to GDP growth.
Chinese demand softens in April as production rises
Chinese retail sales rose 2.3% year-on-year (YoY) in April according to data published by the National Bureau of Statistics (NBS), below the 3.1% registered in March and market expectations for a 3.8% increase. The data marked a new post-pandemic low, with auto sales falling 5.6% YoY and acting as the largest drag. The announcement at the end of April of a scheme to trade-in more polluting vehicles in return for subsidised electric vehicles or fuel-efficient cars in China could support demand for the rest of 2024. While demand for autos is falling, supply in China is rising and driving stronger industrial production data. Auto production rose 16.3% YoY in April, above the 9.4% reported by the NBS in March and contributing to a 6.7% YoY increase in overall industrial production. The rise in industrial production in April was above the 4.5% YoY recorded in March and market expectations for a 5.5% increase.
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