STICKY INFLATION SENDS BOND YIELDS BACK UP AND SUNAK CALLS AN EARLY SUMMER ELECTION

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Data Sourced from FE Analytics, and Bloomberg Finance LP

STICKY INFLATION SENDS BOND YIELDS BACK UP AND SUNAK CALLS AN EARLY SUMMER ELECTION

This week Rishi Sunak committed to a general election on 4 July. With the Conservatives trailing badly in the opinion polls, Sunak had been expected to wait and allow time for the economy to improve and for the Bank of England to cut rates. But Sunak has gambled that this is as good as it is likely to get. CPI is close to target and falling, and now he will not have to explain away rising inflation in the autumn. Meanwhile stickier inflation makes it harder for the Bank of England to cut rates in the very short term and higher government borrowing has wiped out any chance of further tax cuts to sweeten the electorate. Sunak’s reasoning is sound but that alone won’t improve the Tories’ re-election prospects.

The same factors that shaped Sunak’s decision have been spotted by bond markets and yields have risen as the Bank of England now has less scope to cut rates. But, unlike Sunak, long-term investors do have time on their side. Other indicators this week mean that bond markets aren’t simply waiting and hoping for something to turn up, as slowing business activity and lower retail sales add to reasons for a rate cut later this year.

UK: BONDS FALL AS DECLINE OF INFLATION MORE MODEST THAN EXPECTED

UK inflation fell sharply last month. CPI dropped to 2.3% from 3.2% in March as lower energy prices took effect. Core inflation, excluding volatile food and energy costs, also fell, although the decline was more modest. However, the drop in inflation fell short of expectations and this dampened expectations for a rate cut next month as government bond prices fell and yields rose. Disappointing UK inflation data was in contrast to statements from the Bank of England governor and deputy governor as both appeared more optimistic about rate cuts when they spoke earlier in the week.

Several members of the Federal Reserve warned that more evidence that inflation is falling towards target is needed before cuts can be considered. In addition, minutes from the most recent Fed interest rate meeting showed some members would support a further rate hike if inflation remains high. Although US inflation has fallen since then, a more pessimistic mood in bond markets pushed down US government bonds as US treasury yields increased.

TECH: NVIDIA EARNINGS EXCEED AMBITIOUS EXPECTATIONS

Nvidia completed a round of positive updates from the Magnificent Seven giant US technology stocks. The maker of the high-end microchips comfortably exceeded expectations for sales and profits as it continues to benefit from the growth of AI. Revenues increased 262% in the last quarter and its chief executive said growth is likely to continue. The company reported sales of $26bn in its last three months and forecast sales of $28bn next quarter. Nvidia also announced a 10 for 1 stock split to help with liquidity and broaden access for smaller investors, and it increased its dividend.

The company’s update comes at the end of a very positive quarter for US companies. Most of the other big technology stocks reported revenues rising faster than expected and those with exposure to AI have performed best. It is not just tech stocks that have performed well. Almost 80% of US listed companies exceeded earnings per share expectations and around 60% exceeded revenue forecasts.

COMMODITIES: COPPER AND GOLD SET FRESH HIGHS

Copper hit a record high as its price rose above $11,000 a ton. This is a gain of around 30% this year from $8,500 at the start of January. Some of the recent increase has been due to speculation following recent gains but structural issues are also a factor. Several key copper mines are running with reduced capacity. Meanwhile the shift to renewal energy and electric vehicles is expected to result in severe shortages.

Gold also set a new record high as concerns about political tensions in the Middle East and Asia and speculation that the Federal Reserve will be able to cut rates drove prices higher. Chinese consumers have become large buyers of gold in the last 12 months as elevated stock market volatility makes some investors more cautious of equities. The Chinese central bank has also been a huge buyer of gold. This additional demand has pushed gold above $2,440 an ounce. Meanwhile the prices of other metals such as tin and aluminium have also risen, and both metals are trading at their highest prices in two years.

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