Market Report - 21/05/2024

Markets await UK inflation report

With a relatively busy week ahead in the economic calendar, it was announced this morning by data provider Kantar that UK grocery inflation has now slowed to its lowest level in 2.5 years.

It was announced that whilst prices are 2.4% higher than where they sat 12 month ago, they are in fact down from April’s reading of 3.2%. That is the lowest level reported since 2021 and is now less than a percentage point above its 10-year average of 1.6% between 2012 and 2021. 

The main event this week, in the UK, is tomorrow’s inflation report which is expected to confirm that price rises are slowing, with the Consumer Prices Index expected to fall to 2.1% in April, from 3.2% in March. The sharp decline toward the governments 2% target can mainly be attributed to downward movements in energy costs which have fallen 12% this year for most households. The focus beyond tomorrows announcement will be on what lower inflation might mean for interest rates in the UK, with the Bank of England having raised the cost of borrowing at 14 successive meetings between December 2021 and August 2023, the MPC have left rates unchanged since – despite calls for a rate cutting cycle to begin. 

Up until last week there was supposedly a 50% chance of a rate cut in June (or potentially August) but was dependent on how the wider economy was performing, alongside consistent drops in the inflation rate. However, The B.O.E have now given its strongest indication yet that interest rates could be cut this summer, with Bank deputy Governor Ben Broadbent outlining there is possibility of a rate cut over the summer in a recent speech. Interestingly, Broadbent was one of the majority members who voted to keep rates on hold at the last meeting, where rates were maintained at 5.25%. 

Elsewhere in the UK, it was announced that the number of British manufacturing orders have contracted this month, at the fastest rate since November sinking to a -33 from April’s reading of -23. The survey's reading of future selling price expectations fell in May to +15 from +27, its lowest since January - something that Bank of England MPC members are likely to view as good news, while they weigh up the possibility of interest rate cuts over the summer.

In Europe, German wholesale price deflation accelerated more than expected last month, according to the latest figures released by the Federal Statistical office, Destatis. The producer price index (PPI) fell at a rate or 3.3% (Year on year), resulting in a 10th straight month of falling prices. Lower energy prices again have continued to be the main reason for overall drops in the rate, with costs falling by 8.2%. 

 In the US, Treasury secretary Janet Yellen has been urging leaders across Europe, to respond to China’s industrial policies in a “strategic and united way” alongside the US. Speaking in Frankfurt, Germany today just a week after President Joe Biden announced new tariffs on some Chinese-made goods. The former Fed Chair Yellen has stated that China’s excess industrial capacity is a threat to American and European firms and a united approach to protect manufacturers on both sides of the Atlantic is the best way to respond. 

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