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US stocks continued to extend their May advance, looking to put April’s losses behind them albeit in a relatively quiet trading week. There was a lack of notable economic data releases, with weekly jobless claims rising to 231,000 for the prior week, its highest level since August, while the University of Michigan’s preliminary reading of its consumer sentiment index for May unexpectedly fell to its lowest level in six months. There was however a muted reaction, with focus on this week’s release of the consumer and producer price indexes to see if there is any let up in inflation. For the week, the S&P 500 added 1.9%, closing in on its all-time high, with the more defensive sectors like utilities and industrials outperforming growth peers. The Dow Jones rose 2.2% extending its winning streak to eight sessions, its longest of the year, while the Nasdaq Composite added 1.1%. Treasury yields ended the week little changed, with the yield on the 10-year note ending at 4.50%, a fraction lower.

European markets had a strong week, supported by company earnings and growing optimism around central bank rate cuts. For the week the pan-European STOXX 600 ended 3% higher, its biggest weekly rise since January and closing at a record high. German, French and UK regional indices also closed at record highs. Sweden’s Riksbank became the latest central bank to cut interest rates, reducing its key interest rate to 3.75% from 4.00%. Minutes from the European Central Bank’s April policy meeting also signalled that a rate cut could happen as soon as June. The Bank of England held its key policy rate unchanged but also indicated that it was moving closer to policy easing, highlighting the divergence between European and the US central banks.

In Japan, attention remained on the currency following speculation of intervention in foreign exchange markets the prior week. For the week the yen depreciated further against the US dollar. Despite yen weakness the Nikkei 225 ended marginally below the flatline. There were hints from Bank of Japan governor Kazuo Ueda that there may be further interest rate hikes to counter inflation which may be pressured by the currency weakness. Returning from the prior week’s holiday period, the Shanghai Composite ticked up 1.6%, with tourism revenue growth over the break surpassing pre-pandemic levels. The Hang Seng rose 2.6% over the week. Sentiment was also supported by April China trade data with imports increasing more-than-expected and exports reversing a decline.

Weekly macro highlights

Bank of England leaves rates unchanged in May

The Bank of England (BoE) left the Bank rate unchanged at 5.25% at its meeting on 9 May. There was a marginal dovish shift in the balance of votes within the Monetary Policy Committee (MPC), with two members advocating for a 25 basis point rate cut in May as opposed to just one in March. The MPC highlighted progress in key economic data but that it is not yet at a point where the majority of members would feel comfortable reducing interest rates. As reported in the May Monetary Policy Report, the BoE expects inflation to fall to 2% in Q2 2024, before rising to 2.6% in Q4 2024 due to base effects for energy prices. There was also a slight dovish shift in the language of the Monetary Policy Summary, with the Committee noting it will “keep under review for how long the Bank Rate should be maintained at its current level”.

UK GDP growth rises in Q1

UK GDP rose 0.6% quarter-on-quarter (QoQ) in Q1 2024 according to preliminary estimates published by the Office for National Statistics. The data was above market expectations and the BoE’s forecast for a 0.4% expansion. It also marked the end of the technical recession in the UK, with GDP having contracted in both Q3 and Q4 2023. Q1’s GDP growth was driven by a 0.7% increase in services output, with 11 out of the 14 subsectors exhibiting positive growth. The greatest contributions came from transportation and storage, and professional scientific and technical activities, which contributed 0.15 and 0.13 percentage points respectively to the 0.6% QoQ GDP growth. The production sector also saw output growth in Q1, with a 0.8% increase reflecting 1.4% manufacturing output growth offsetting a 2.4% decline in output of water supply, sewerage, waste management and remediation activities. Construction sector output fell 0.9% in Q1, driven by a decline in new work.

Swedish Riksbank cuts rates in May

Sweden’s central bank, the Riksbank, reduced its policy rate by 0.25 percentage points to 3.75 at its meeting on 8 May. Underlying inflation, as measured by the consumer price index with fixed interest rates (CPIF), has been in a declining trend since its peak of 10.2% year-on-year (YoY) in December 2022, and reached 2.2% YoY in March. Excluding energy prices, core CPIF inflation was 2.9% in March. Although both measures of inflation remain above the Riksbank’s 2% target, they were both lower than the central bank’s forecasts from its March Monetary Policy Report of 2.7% and 3.3% YoY, respectively. The Riksbank Executive Board also noted that “inflation expectations are firmly anchored and wage increases are moderate”. The outlook for inflation remains uncertain however, with the Swedish central bank reiterating its concerns over recent depreciation of the Swedish krona as one of the main upside risks. Nonetheless, markets anticipate two further rate cuts in 2024.