Shaw and Partners

In a shortened trading week due to the Juneteenth holiday, the major US indexes experienced gains. The S&P 500 continued to hit record highs, closing 0.6% up for the week; boosted by strong performance in the consumer discretionary and energy sectors which climbed 2.5% and 1.9% respectively. Energy was helped by rising oil prices, meanwhile, tech stocks faced a downturn in the week with major players such as Nvidia and Apple recording losses; 4% and 2.4% respectively. The Dow Jones Industrial Average closed the week up 1.5% and the Nasdaq Composite closed flat.

US economic indicators presented a mixed picture throughout the week. Retail sales increased 0.1% in May while sales at bars and restaurants as well as grocery stores both fell by 0.4%, indicating consumers were spending cautiously. Payrolls in the services sector recovered from two months of declines by increasing at their best pace in five months. Manufacturing signals were strong, with industrial production expanding just shy of 1% in the week, and reports showed that factories were operating at 79% of capacity. Treasury yields experienced positive performance with the 10-year note closing five basis points up at 4.26%.

European markets also experienced broad positive momentum in the week. The pan-European STOXX 600 closed the week 0.8% higher and the FTSE 100 climbed 1.1%. The Bank of England (BoE) kept interest rates unchanged at 5.25% with seven members of the committee voting to keep rates steady, while two members voted in favour of a cut to 5%. Headline inflation dropped to the BoE’s target of 2% in May, down from 2.3% in April. Both data points are positive signals that policymakers may be approaching a decision to cut rates. Norges Bank also kept rates unchanged at 4.5% while the Swiss National Bank cut rates by 0.25% to 1.25% - their second consecutive rate cut.

In contrast, Asian markets experienced weaker performance with Japan’s Nikkei 225 slipping 0.6%. The yen weakened further, approaching a 34-year low with the exchange rate sitting at JPY 158.8 against the USD versus 157.4 the previous week. The yen weakness helped to accelerate exports to the US and China which soared just shy of 14% year-over-year in May. In China, the Shanghai Composite recorded a loss of 1.1% and the Hang Seng fell 0.5%. Investors grappled with mixed economic data in the week with industrial production rising less than expected to 5.6% in May, and retail sales increasing more than expected to 3.7% in May. Adding to China’s housing market slump, new home prices fell their sharpest month-on-month contraction in almost a decade, down 0.7% in May.

Weekly macro highlights

US labour market and housing shows signs of weakness

Data released on 20 June showed that despite the weekly decline in the number of unemployment benefit claims, the four-week average of claims, which reduces some of the volatility in the data, increased by 5,500 to 232,750 last week. This represented the highest reading since September 2023. Additionally, data on new housing construction showed a decline to the lowest level in nearly four years in May. Housing starts fell 5.5% last month, adding to a 19.3% decline year-on-year. New construction had been boosted by a shortage in housing supply, but this has stopped given the surge in mortgage rates this year. According to data from Freddie Mac, the average rate on a 30-year fixed mortgage increased to 7.22% in early May. Signs of weakness in the labour market and deceleration in housing starts suggests economic activity will remain moderate in Q2-24, adding to expectations of rate cuts in Q3-24.

BoE keeps rates on hold despite inflation reaching 2%

The Bank of England (BoE) kept interest rates unchanged at 5.25% as anticipated by markets. Similar to the previous meeting, the committee voted 7-2 to maintain rates on hold, with two members voting in favour of a rate cut. BoE officials acknowledged that current interest rate levels are weighing on economic activity, which will lead to a looser labour market and softer inflationary pressures. However, the Monetary Policy Committee (MPC) highlighted the need for monetary policy to remain sufficiently restrictive to ensure risks of inflation becoming embedded above target dissipates. Earlier in the month, labour market indicators showed signs of a deceleration in jobs growth, while the unemployment rate increased to 4.4%. Despite inflation declining in May to the target level of 2% YoY, average wage growth remained elevated at 5.9%. Services inflation, which is also closely followed by the MPC, remains elevated despite a deceleration to 5.7% in May.

Central Bank of Brazil ends easing cycle and keeps rates on hold

Members of the rate-setting committee (Copom) at the Central Bank of Brazil voted unanimously to stop the rate-cutting cycle, which started in August 2023, and keep the Selic rate unchanged at 10.50%. The Copom cited higher inflation expectations in Brazil, the negative fiscal outlook and the delayed rate cuts in the US as the reasons to end the easing cycle. The decision came against a backdrop of rising inflation expectations for 2024 and 2025. Inflation increased to 3.93% year-on-year in May, as the central bank raised its inflation projections to 4% in 2024 and 3.4% in 2025. The weakness in the Brazilian real and projected increase in food prices due to floods in the southern part of Brazil weighted on the decision. Expectations are now aligned for rates to remain on hold for the remainder of this year, despite comments from President Lula that interest rates are still too high.