Shaw and Partners

US stocks were cautious for much of the week as investors eyed up Friday’s release of the Federal Reserve’s preferred inflation gauge, the personal consumption expenditure (PCE) price index. The PCE index held at 2.7% year-on-year in April, in line with economists’ expectations, with a Fed rate cut in September roughly even odds. Following the inflation data, the Dow Jones Industrial Average rose 1.5% in its best session of the year. Despite this, its wasn’t enough for the index to avoid a weekly loss in a holiday shortened week. Indeed, the S&P 500 and Nasdaq also saw small weekly declines, snapping five-week winning streaks, with growth stocks underperforming value. There was particular weakness in Salesforce following a rare earnings miss from the cloud software provider.

Stocks had been under pressure by rising US Treasury yields earlier in the week. This came after weak demand for auctions of five- and seven-year Treasury notes. The yield on the 10-year Treasury note had been up above 4.6%, a four-week high, however it retreated following the inflation data and ended the week at 4.5%.

Similar to the US, European investors spent much of the week on edge ahead of inflation prints, with Friday’s reading of headline eurozone inflation rising 2.6% year-on-year in May. This was stronger than expected, however this will unlikely prevent the European Central Bank from cutting interest rates at its next meeting in June but will cause doubts about a subsequent cut in July. In response the 10-year German bund yield hit its highest level in over six months, rising to 2.7%. For the week the pan-European STOXX 600 lost 0.5%, its second consecutive week in the red, although some regional indices saw small gains.

Japan’s Nikkei 225 lost 0.4% for the week while the broader Topix index managed to gain 1.1%, again with the focus being on when the first rate cut from the US Fed is expected. In addition, there was speculation on the path of action by the Bank of Japan. Tokyo’s core consumer price index rose 1.9% year-on-year in May, in line with expectations, although with it being slightly below the central bank’s target it may lessen the case for imminent rate hikes. The yen once again held near 34-year lows, with data revealing that Japanese authorities spent $62bn in the foreign exchange markets from 26 April to 29 May.

In China the Shanghai Composite ended slightly below the flatline while Hong Kong’s Hang Seng saw a more notable drop of 2.8%. This came after unexpectedly weak purchasing managers’ index (PMI) data, whereby the National Bureau of Statistics’ manufacturing PMI dropped to 49.5 in May, re-entering contractionary territory. Latin American equity indices were mostly lower, with the exception of Argentina’s Merval, which spiked higher. Mexico’s BMV index was slightly lower ahead of Sunday’s presidential vote.

Weekly macro highlights

US PCE inflation unchanged in April

US personal consumption expenditure (PCE) inflation rose 2.7% year-on-year (YoY) in April according to data published by the Bureau of Economic Analysis (BEA). The data, which was in line with market expectations and unchanged from March, reflected a 0.3% month-on-month (MoM) rise in headline inflation. Goods inflation rose 0.1% YoY, with a 1.4% increase in non-durable goods prices offsetting a 2.2% decline in durable goods prices. Services inflation continued to be the main driver of overall headline inflation, rising 3.9% YoY in April, marginally below the 4.0% increase in March. Food and energy prices rose 1.3% and 3.0% YoY respectively. Excluding food and energy, core PCE inflation was unchanged at 2.8% YoY. In MoM terms, core PCE inflation eased from 0.3% to 0.2% in April, below market expectations for another 0.3% print. The data is the final release of the Federal Reserve’s preferred measure of inflation ahead of its meeting on 12 June, at which markets expect no change.

Tokyo inflation increases in May

Tokyo’s headline consumer price index (CPI), a good leading indicator of nationwide inflation in Japan, rose 2.2% year-on-year (YoY) in May according to data published by the Statistics Bureau of Japan. The data was above the 1.9% YoY increase registered in April. Core inflation, which excludes fresh food but includes energy prices, rose 1.9% YoY in May, above the 1.6% increase in April and in line with market expectations. The data was driven by an increase in electricity prices, which rose 13.1% YoY having fallen 2.1% YoY in April. Excluding both fresh food and energy prices, core-core inflation rose 1.7% YoY in May, below the 1.8% increase in April. Services prices, which the Bank of Japan has been watching closely as an indicator of domestic underlying inflation, fell from 0.8% YoY to 0.7% YoY. The data marks the final inflation release ahead of the Bank of Japan meeting on 14 June, at which markets expect no change.

Swiss GDP expands in Q1

Swiss GDP rose 0.5% quarter-on-quarter (QoQ) in Q1, above the 0.3% registered in Q4 2023, which markets had expected to be repeated in the first quarter of the year. Adjusted for sporting events, GDP rose 0.3% QoQ, unchanged from the increase in Q4 2023. The industrial sector continued to struggle in Q1, with value added by manufacturing falling 0.2% QoQ. The chemical and pharmaceutical industry saw a 0.9% QoQ decline in value added. GDP growth in Q1 was driven by the services sector, with value added in the accommodation and food services sector particularly strong, rising 1.3% QoQ. Value added in the retail sector rose 1.4% QoQ. This was reflected in stronger private consumption, which rose 0.4% QoQ in Q1. In year-on-year terms, GDP rose 0.4% in Q1 after adjusting for sporting events, below the 1.2% registered in Q4. The State Secretariat for Economic Affairs noted that Q1 GDP growth in Switzerland was below average.