Markets in a minute 17th June 2024

Last week, the S&P 500 rose by around 1.4%, supported by lower inflation and increased expectations for rate cuts. By contrast, the Stoxx Europe 600 was down by approximately 2.2% as the prospect of a far-right government in France weighed on French stocks, which account for some 18% of the index and declined by 6% (CAC 40 index).

The week started with a bang - the unexpected announcement of French parliamentary elections by President Macron (round one on June 30th and round two on July 7th), which raised political uncertainty in France. After victory for the far-right National Rally in European elections - it received double the vote share of Macron's alliance - and strong polling, there were increasing concerns that the party could get a majority in parliament next month or there could be a hung parliament leading to policy paralysis. This increased political and policy uncertainty weighed heavily on stocks in France last week.

Meanwhile, US data were positive. May consumer prices rose by 3.3% y/y and core prices, which excludes volatile items like food and energy, rose by 3.4%. Both were lower than market expectations and decelerated from April levels. In addition, the monthly rise in core prices (0.2% m/m) was the lowest since August 2021. Taken together, this suggested that price pressures might be easing.

The Fed meeting led to no change in policy, as expected. However, the central bank's projections suggested one rate cut in 2024 down from three estimated in March forecasts. This was viewed by the market as meaning that rates would remain 'higher for longer'.

However, falling inflation outweighed this as it increased the chances of rate cuts, which in turn pushed bond yields lower (bond prices rise as bond yields fall) last week. US Treasury 10-year yields fell to 4.21%, the lowest since March and the equivalent German bund fell to 2.34%, the lowest since April.

In France, government bond yields spiked amid the potential for increased spending and uncertainty under a far-right government. The 10-year yield rose to as high as 3.25%, the highest level since November, and the spread over equivalent German bunds rose to 75bps, above the extremes reached during Covid and in 2022.

This week, activity data from China (today) and the US (tomorrow) are likely to be in focus ahead of global PMI (business survey) data on Friday. Overall, the data should give a snapshot of current economic and business conditions and expectations for the months ahead.