Market Report - 22/05/2024
UK inflation moves closer to target ; Markets await EU PMI estimates
The Pound has jumped higher this morning against all G10 peers, following news that the much-anticipated inflation reading came in higher than expected at 2.3% year on year (down from 3.2%). The market was expecting a reading of 2.1%, just above the government and B.O.E’s target of 2%, meanwhile the services inflation component of the release was notably hotter than expected at 5.9%, with expectations set at 5.5%.
The ONS announced this morning that electricity and gas prices dropped in a record fashion of 27%, meanwhile food price inflation was the lowest rise since November 2021 which was great news for consumers. Prices of food and non-alcoholic beverages rose by 2.9% in the year to April, down from 4% in March meaning the rate has now eased for 13th consecutive months.
Prime minister Rishi Sunak commented this morning that inflation is now “back to normal” and has suggested that today’s inflation figures show that the “plan is working” as the government try to wrestle inflation back down towards its 2% target. Whilst it is moving in the right direction and is now far closer to the 2% target, the odds of an interest rate cut at the Bank of England in June are now materially lower than 50%, having been close to 60% just days earlier, which is a big blow for those hoping for lower interest rates.
The rise seen in the value of the Pound this morning reflects this readjustment in expectations for Bank of England, with GBPUSD now trading at its highest level since 21st March this year and GBPEUR trading at its highest level since July 2022.
Elsewhere in the UK, government borrowing has moved higher taking it to the 4th highest figure in the month of April, on record. It was announced this morning that the Govt borrowed a total of £20.5bn last month, which was £1.5bn more than the total in April and £1.2bn more than the forecasted amount by the Office for Budget Responsibility.
In Europe, markets await the flash estimates for purchasing managers’ indexes in the eurozone which are released tomorrow (Thursday). They are initial estimates for the current month that are subject to revision and are expected to show that the region's economy is still expanding. The estimates which are due to be released by S&P Global on Thursday, will provide an updated snapshot of the health of the economy, after a good start in the second quarter. The main question on the lips of both Investors and borrowers is still whether or not the ECB will be cutting rates in June. The European Central Bank monetary policy meeting will take place on June 6, with economists anticipating a first interest rate cut then, however some analysts have become more cautious about possible cuts after June.
The ECB will want to see that inflation is consistently coming down and inflationary pressures are ultimately continuing to ease, however, last months’ PMI survey showed that inflationary pressures were intensifying across the EU economic area due to increases in both input and output costs.
Finally, this evening the minutes of the Fed’s late-April meeting are due for release where investors are hoping for more cues from the Central bank. The Fed decided to keep rates on hold during the meeting, while Chair Jerome Powell still flagged the possibility of rate cuts in 2024, so investors will be keeping a close eye to see if this was the case among all Fed officials, especially as inflation remained sticky.