Week ending 19th July 2024.

As expected, the ECB decided to leave their key lending rates unchanged on Thursday at 3.75%. The decision was reflective of information surrounding the medium-term inflation outlook, they said in their post-announcement statement. While the inflationary effect of high wage growth has been mitigated by profits, the Bank noted that domestic price pressures are elevated, services inflation remains sticky and stubbornly high, and headline inflation will likely exceed the Bank’s 2% target until at least 2025. ECB President, Christine Lagarde, stated that their next rate decision in September was widely undecided at the moment, and reiterated her commitment to being led by the relevant economic data. As the market had already baked in a stay of rates from the first Western central bank to initiate a cut for some time, markets were muted following the announcement.

A raft of data also emerged from the UK last week. Unemployment in the three months to the end of May remained unchanged at 4.4%, with the highest levels seen in the East Midlands (5.6%) and the lowest in Northern Ireland (2.0%). In terms of policy decisions, however, it is more likely that the Bank of England will take more note of the latest wage growth figures. Data released showed that wages grew by 5.7% in the three months to May. Although this growth was the slowest in core pay since the summer of 2022, it is still outpacing the current inflation figure for the region of 2% and has investors wondering whether an August rate cut will now be postponed to September. Policymakers are likely to wait for further evidence of the labour market cooling before easing restrictions. Although there was an increase in the minimum wage in April, its effects on pay growth are now diminishing. This slowing in pay growth might influence their decision-making process.

And yet, the UK consumer seemingly would enjoy a rate cut sooner rather than later, with retail sales data showing a decline in June. Sales volumes were estimated to have declined 1.2% in June, after a rise of 2.9% in May. The Office for National Statistics stated that the primary contributors to the decline were the main types of shops, like department stores, clothing shops, and furniture stores, but excluding petrol stations. Retailers suggested that factors like the uncertainty of the recent election, rainy weather and low footfall affected shoppers’ spending.

Japan’s core inflation increased for the second consecutive month in June. Prices grew by 2.6% in contrast to May’s 2.5%, but narrowly missed expectations of a 2.7% rise. June’s figure is the result of factors like an increase of 7.7% in energy prices and a reduction in subsidies for utilities. Friday’s data also showed service inflation perked up to 1.7% in June from 1.6% in May, illustrating that companies continued to offset rising labour costs through price hikes. Policymakers will decide on 30th-31st July whether another interest rate hike is in store.

On Friday, a global cyber outage dampened investor sentiment as it disrupted the workings of operations across various industries. It is thought that the outage originated from a product update from cyber security firm, Crowdstrike, which fell by 11.1% by close of play. While the outage was relatively short lived, the reminder to the market of how many systems are deeply integrated with and dependent upon cybertechnology saw the momentary fall of share prices across the board.

On Sunday President Joe Biden announced he will not run in the upcoming November election, responding to growing concerns about his performance and campaign viability, along with increasing sentiment that having survived an assassination attempt would result in Trump being re-elected in office. As a result, public donations to the Democratic Party have surged, reflecting voter optimism. Biden has endorsed Vice President Kamala Harris, who is gaining significant support from senior Democrats and emerging as a leading contender for the presidential nomination. Investors typically respond to political uncertainty with caution however, markets might favour Harris’ potential candidacy if she is seen as continuing Biden’s policy agenda, as investors prefer predictability.

Still to come this week we have Eurozone PMI data, US PMI data, US GDP and PCE data and Japan’s latest PMI data.

Nicola Tune, Portfolio Specialist

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