Fed and BoE Wrestle with Fragile Confidence as ECB Cuts First

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Eurozone Market Update

In May, the flash figures show that eurozone headline inflation rose to 2.6%, from 2.4% in April (see Chart of the Month). Core inflation stood at 2.9% versus expectations of 2.7%. Services inflation was up to 4.1% from April’s 3.7%. However, despite the inflation bump, the market expectation at the beginning of the month was for the European Central Bank (ECB) to make its first rate cut at its 6 June meeting, which proved correct as a 25 bps cut came to pass. The region’s composite Purchasing Managers’ Index (PMI) continued to trend up in May, hitting 52.3. This beat the previous month’s score (51.7) and consensus (52.0). The increase was led by manufacturing PMI, which increased to 47.4 from 45.7, while services PMI remained at 53.3.

_{Source: Bloomberg, data as of 31 May 2024}

UK Market Update

The Bank of England’s Monetary Policy Committee (MPC) kept the base rate unchanged at 5.25% in May. The voting split was 7-2, with two members favouring a cut. Rate cuts are only likely in the second half of 2024 as the MPC seeks more evident signs from domestic-led inflation. The UK labour report was mixed, with unemployment up to 4.3% in March. Still, wage costs reaccelerated, as private sector average weekly earnings came in a little hotter than anticipated. Markets saw this as a positive sign for lower rates. UK headline inflation fell to 2.3% in April, but core inflation surprised to the upside at 3.9%, versus 3.6% expected. Services inflation is still running strong at 5.9% compared to the previous print of 6.0%. The inflation print led markets to push back the timing of a rate cut to November 2024. Elsewhere, Prime Minister Rishi Sunak announced the UK general election for 4 July 2024, but the consensus is that the election result will not cause any significant changes in the market.

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