A quiet calendar gave little directional impulse to markets this week. In equities, strong earnings results from tech giant Nvidia advanced the Nasdaq to new closing highs but this was unable to inspire indices in Europe and Asia. This week's hawkish RBNZ meeting caught markets offside as its revised cash rate track signaled an on-hold stance in restrictive territory until well into next year. Locally, the Australian dollar saw its sharpest weekly fall against the US dollar in 6 weeks.
May's FOMC meeting minutes contained hawkish sentiments that, however dated by last week's improved CPI release, were able to move markets in a fairly quiet week in the US. There had been discussion around the uptick in the momentum of inflation since the turn of the year leading the FOMC to think that gaining "greater confidence" in the outlook for a return to 2% inflation would now take longer to achieve. Moreover, there was uncertainty expressed around the current extent of restrictiveness of monetary policy, with "various participants" willing to tighten further if "such an action became appropriate".
What was seen as a line-ball decision between June and August for the first BoE rate cut has swung firmly to the latter as UK inflation slowed by less than expected in April. Headline CPI fell from 3.2% to 2.3%yr (vs 2.1% expected) - the decline driven by energy-related base effects - while a more marginal slowing was seen in the core rate from 4.2% to 3.9%yr (vs 3.6%). The positive is that headline inflation is now within striking distance of the BoE's 2% target, but on the other hand, annual price resets saw services inflation coming in at an elevated 5.9% (vs 5.5%) from 6% previously. By contrast, goods prices are now in deflation (-0.8%yr).
Improving growth momentum in the euro area through early 2024 looks to have continued into the second quarter. Business activity according to May's flash PMI lifted to a reading of 52.3, a 12-month high. Faster growth in output, new orders, and employment supported the overall rise in activity from the prior month (51.7). Activity in the services sector (53.3) expanded for the fourth month in succession while the manufacturing gauge (49.6) improved to a 14-month high that indicates the downturn in the sector may be about to turn. Better growth and an uptick in wages growth in Q1 has clouded expectations for the extent of policy easing from the ECB past the June rate cut that it will almost certainly deliver. Negotiated wage growth lifted from 4.5% to 4.7% year-on-year to Q1, an upside surprise on expectations for a slowing to 4%Y/Y. This could be more noise than signal, with more timely measures of wages growth slowing since the start of the year. The driving factor behind the rise in negotiated wages was new wage agreements in Germany coming into effect that were playing catch up to high inflation.
The minutes of the RBA's May meeting outlined what was a broad-ranging discussion on policy from the Board. Although much of the focus went to the consideration the Board gave to hiking rates, I think the most significant development was the insight that the Board judged its current strategy remained fit for purpose whereby it is aiming to gradually return inflation to target "within a reasonable timeframe". This approach seeks to balance in equal measure the risk of inflation expectations shifting up against a sharp increase in unemployment. The new forecasts published at the May meeting indicated to the Board that there was "a credible path" by which it could return inflation to target with employment continuing to rise. Overall, markets sense that the RBA is reluctant to hike further despite its neutral guidance that it is "not ruling anything in or out", a factor that may have weighed on the AUD this week.
