We have seen a stronger week across risk assets, with US equities once again making record highs and European equities recovering some of the lost ground from last week with political concerns weighing less heavily on risk appetite
The economic data showed UK inflation finally back on target but the Bank of England meeting yesterday showed they are not in any hurry to cut rates, with services inflation still proving sticky.
I wrote last week about tech stocks leading US equities to record highs; this is a theme that has continued this week with fresh records for the S&P500 index and Nvidia taking the crown as the world’s most valuable company, albeit for one day only (Microsoft re-took the crown yesterday). Nvidia’s market cap is now $3.22 trillion, just below Microsoft and above Apple. For comparison, the market cap of the entire FTSE100 in the UK is $2.72 trillion. A decade ago, the entire UK stock market was 400 times larger than Nvidia. The company’s shares are up 164% this year, adding over $2 trillion in market cap. The company has seen two successive quarters of substantial revenue growth, up 265% year on year in February and 262% in May, but the growth in the share price is eye watering. The ‘long Magnificent 7’ position is seen as the most ‘crowded trade’ in the monthly Bank of America Fund Manager Survey, but this has been the case for the past 12 months. Until we see Nvidia’s growth trajectory underwhelm expectations, positive sentiment and the ‘fear of missing out’ suggests the upwards momentum can continue.
The economic data for the week was headlined by the UK inflation data, which came in at the Bank of England’s target level for the first time since July 2021. CPI for May was 2%, as expected and down from 2.3% in April, driven lower by food and non-alcoholic beverages, recreation and furniture prices. However, the data for services inflation was less encouraging, with services CPI at 5.7% year on year in May, down from 5.9% in April but ahead of the 5.3% level expected. Core inflation, which excludes food and energy, eased to 3.5% in May compared to 3.9% in April. UK inflation is likely to accelerate somewhat over the coming months, as the tailwind of falling energy prices once again becomes a headwind. The October – December energy price cap is likely to see a 12% increase on current levels though this will not be confirmed until the late summer. While the Bank of England has some bandwidth to ease policy later this year, greater signs of a slowing in services inflation would allow for further rate cuts as we move through 2025.
Elsewhere in the economic data, the monthly ‘data dump’ from China brought mixed results. Retail sales were stronger than expected, up 3.7% year on year, but Industrial production, up 5.6% was some way below expectations. New home prices fell for the 11th month in a row and are down 4.3% year on year, with used home prices down 7.5%. Without some stabilisation in the housing market, it is hard to be positive on the economic outlook for China. Chinese equities have rallied from oversold levels earlier in the year but the consensus view remains that the piecemeal stimulus we have seen over recent month needs to be ramped up, along with significant further support for the property market, for a more positive view to be taken. With the spectre of additional tariffs and the ongoing theme of ‘de-globalisation’ as supply chains are brought closer to home, or to ‘friendly’ countries, the western view of China appears structurally impaired given the prevailing geopolitical backdrop.
The Bank of England meeting yesterday saw interest rates kept on hold at 5.25% for the seventh consecutive meeting in what the minutes described as a “finely balanced” decision for some members. The Monetary Policy Committee voted by 7 votes to 2 to keep rates on hold. Governor Andrew Bailey said it was “good news that inflation has returned to our 2 per cent target” but added “we need to be sure that inflation will stay low and that’s why we’ve decided to hold rates for now”. Minutes show that some members who voted for a hold judged the decision “finely balanced” and the MPC concluded that higher than expected services inflation “did not alter significantly the disinflationary trajectory that the economy was on”. The minutes showed that members were looking for “more evidence of diminishing inflation persistence” before they cut rates. As a result of the meeting, market expectations for an August cut increased to a probability of 64%. If markets and this week’s opinion polls are right, it looks like the probable new Labour government’s honeymoon period may include a nice gift from the Bank of England in the form of a rate cut.
Have a good weekend,
Kind regards,
Anthony.
