Markets in a minute 4th June 2024

Last week, the S&P 500 and the Stoxx Europe 600 both fell by 0.5% as central bank speakers in the US guided towards fewer rate cuts in 2024 and inflation accelerated in the Eurozone.

Q1 GDP growth in the US was revised down to an annualised rate of 1.3% q/q due to lower than previously estimated consumer spending. The Fed Beige book, which is a survey of US economic conditions, for April-May showed moderate growth but concerns remained around elevated prices that was impacting both consumers and businesses. Moreover, ISM manufacturing - a survey of gauging business sentiment and economic conditions in America - declined in May and indicated falling production, with the new orders subcomponent at a 12-month low.

Eurozone consumer prices rose by 2.6% y/y and core by 2.9% y/y in May, with both accelerating from April. The increase in inflation was driven by services prices rising at the fastest pace in seven months (4.1%). While the ECB is expected to reduce its policy rates at this week's meeting, continued upward pressure on prices may limit further rate reductions.

Indeed, the Eurozone showed further signs of improvement in other Q2 data, weakening the case for rate cuts beyond June. The unemployment rate for the region fell to a historical low 6.4% in April while consumer sentiment was more positive in May.

Meanwhile, the US Treasury auctions - when the government sells bonds to fund spending - last week showed weaker demand and this pushed bond yields higher. In addition, some Fed speakers played down the amount of rate cuts that were likely in 2024 while the Fed's preferred measure on inflation (core PCE) remained comfortably above the 2% target at 2.8% in April.

Higher inflation in the Eurozone pushed bond yields higher (bond prices fall as bond yields rise) in the region, with the 10-year German bund yield rising as high as 2.69%, the highest level since November. However, it ended the period flat, pulled lower from the mid-week highs by the weak ISM manufacturing and subsequent lower yields in the US, with the 10-year US Treasury yield falling to 4.40%.

This week, focus is set to be on May labour market data in the US, particularly the employment report on Friday, and the ECB meeting on Thursday - a 25bps cut in the deposit rate to 3.75% expected, but commentary around the future rate path will be closely watched.