The Davy Digest - 15th July 2024

Markets breathed a sigh of relief last week as US inflation came in lower than expected for June. There are now two interest rate cuts expected in the US before year end, with the first cut expected in September. Following the data release, small cap stocks rose strongly on hopes that they will get a boost from Federal Reserve interest rate cuts. European equities finished the week higher after some volatility earlier in the week following the second round of the French election. In the UK, GDP growth came in at 0.4%, double the expected figure. This data will be very much welcomed by the new Labour Government who have vowed to ‘Rebuild Britain’. In China, inflation came in lower than expected due to weak demand, a disappointing release for investors.

Last week's highlights

	US CPI (11/07) – US inflation lower than expected at 3.0% vs 3.1% forecast. Interest rate cut expected in September.
	German Inflation (CPI) (11/07) – In line with expectations at 2.2% year over year.
	UK GDP (11/07) – UK economy grew 0.4% in May vs 0.2% expected, boosted by a continued expansion in the services sector. UK Industrial Production (11/07) – Rose 0.2% month on month, in line with consensus.
	China CPI (10/07) – Chinese inflation was weaker than expected due to weak demand. June CPI came in at 0.2% vs 0.4% expectation.

Looking ahead to this week, retail sales for June will be released in the US. This will be an important update on the health of the US consumer after May’s figure came in weaker than expected. In Europe, the European Central Bank will meet on Thursday and are expected to leave interest rates unchanged after cutting rates in June. The press conference will be key as investors wait to see if a September rate cut will be signalled. In the UK, inflation data will be released on Wednesday. China’s Third Plenum is taking place this week from Monday to Thursday. The policy meeting is a major gathering of the top members of the Chinese Communist Party that typically happens only once every five years. Next week’s meeting is expected to focus on fiscal reform and policy direction.

What's on the radar

	US Retail Sales (16/07)
	ECB Bank Lending Survey (16/07) ECB Meeting (18/07)
	UK CPI (17/07) Retail Sales (19/07)
	China Third Plenum (15/07 – 18/07) China GDP (15/07) China Industrial Production (15/07)

Chart of the moment

Soft US inflation paves the way for an interest rate cut in September

Source: Bloomberg as of 11/07/2024. US inflation as measured by Consumer Price Index

Source: Bloomberg as of 11/07/2024. Projected rates taken from MIPR Bloomberg function

• US inflation came in cooler than expected for June (3.0% vs 3.1%), prompting expectations of two interest rate cuts before year end.
• The probability of the first interest rate cut in September rose to 90% after the release, compared to 74% the previous day.
• On a monthly basis, prices dropped 0.1%, the first negative monthly inflation figure since May 2020. Lower petrol prices and slowing housing related costs aided the drop.
• Markets breathed a sigh of relief as progress on cooling inflation continued. Treasury yields fell and the dollar weakened after the data came out.
• Federal Reserve chair Powell told US lawmakers last week that the labour market was showing signs of cooling and that officials were worried about damaging the economy by holding rates too high for too long.