MARKETS RECEIVE A LIFT FROM THE RETURN OF DISINFLATION IN THE US

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Data Sourced from FE Analytics, and Bloomberg Finance LP

MARKETS RECEIVE A LIFT FROM THE RETURN OF DISINFLATION IN THE US

This week markets warmly welcomed news that US inflation is falling again. After three months of CPI creeping up, the small decline allowed
traders to breathe a little easier, allowed the recent rally in government bonds to continue and added to the equity rally that only a few weeks
ago appeared to be running out of steam. Potentially more significant is the slight slowdown in US consumer spending. US consumer demand has remained surprisingly strong in the face of higher rates and rising costs and this spending has helped power US economic growth. Any consistent slowdown would show elevated interest rates are doing their job and help provide the Federal Reserve with confidence to consider cutting.

Lower spending was also evident in China as retail sales growth was much weaker than expected. In addition, the decline of house prices is accelerating and shows there is still considerable work for the Chinese government to do to restore consumer confidence. For central banks it appears that consumer demand is either too hot or too cold, and they will be hoping to find the solution to their problems somewhere in the middle.

US: LOWER INFLATION AND WEAKER RETAIL SALES LIFT MARKETS

US inflation fell in April, reversing three months of rising prices. Headline CPI dropped from 3.5% to 3.4% as the growth of average rents slowed and the cost of new and used cars fell. Core inflation, excluding more volatile energy and food costs, also fell. US consumer demand eased as retail sales growth slowed. The European Commission issued a more positive update on inflation in the Eurozone. It now predicts
average inflation will drop to 2.5% this year and a return to 2% inflation next year.

Jerome Powell was among a number of Federal Reserve members to warn than it is too early to be talking about rate cuts as more evidence is needed that the decline of inflation is sustainable. However, markets warmly welcomed the news that inflation has started falling again. Government bonds increased as yields fell for the second week in a row. The prospect of an earlier rate cut also saw the dollar fall against most major currencies and US equities led global stock markets higher.

UK: FURTHER SIGNS THAT JOBS MARKET IS COOLING

UK unemployment increased to 4.3% in three months to April. Although the Office of National Statistics has some concerns about the accuracy of this figure, other data also points to a softening of the labour market. Job vacancies have fallen almost 20% since last year, and the number of people who are economically inactive has risen. Private sector data also points to a slowdown. Online recruitment platform Indeed reported a big rise in hard to fill jobs. It says around a third of vacancies now remain open for more than 60 days, up from the long-term average of 20%.

Meanwhile, wage inflation also shows the first signs of slowing. ONS figures show average earnings excluding bonuses increased 6%. However, the Chartered Institute of Personnel and Development says employers intend to offer annual pay increases of around 4%. Average wages remain higher than inflation and this may add to inflationary concerns at the Bank of England, but the rise in unemployment adds to arguments in favour of a rate cut.

EQUITIES: BOOST FOR LSE AS RASPBERRY PI PREPARES FOR LISTING

Raspberry Pi, the UK-based maker of low-cost computers, is preparing to list in the UK. The news is a boost for the London Stock Exchange as the number of IPOs has fallen recently and a number of businesses are considering moving their listing to the US in search of higher valuations. According to Bloomberg, the UK accounted for only 2% of the $12bn raised by IPOs in Europe this year. Raspberry Pi was valued at £597m in 2023. Chinese online fashion retailer Shein is also looking at a UK listing as its plan for a US IPO is held up by regulators’ concerns about Chinese government influence of the company.

The low valuations of UK-listed companies continue to attract attention from overseas buyers. Anglo American turned down an improved offer from Australian rival BHP that values it at £34bn, a premium of 30% compared to before the offer. Meanwhile, International Distribution Services, owner of Royal Mail, said it is likely to support a takeover by Czech billionaire Daniel Kretinsky’s EP Group. The bid of 370p a share would value IDS at £3.5bn.

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