Market Update

On Thursday, a week before the European Central Bank (ECB) meets to decide on interest rates, Eurozone unemployment hit a record low of 6.4% in April, surpassing expectations. The number of unemployed women decreased from 6.9% in March to 6.7%, and youth unemployment also declined, indicating a positive signal for the region amidst a tight monetary policy environment.
However, higher-than-expected inflation data on Friday disappointed investors. Eurozone inflation unexpectedly rose to 2.6% year-on-year in May, up from April’s 2.4%, marking the first increase this year. While markets had anticipated a slight uptick, the rise exceeded expectations, dampening hopes for a swift shift in the ECB’s monetary policy.
The core inflation rate, excluding volatile energy and food sectors, also increased from 2.7% to 2.9% during the same period. This measure is closely monitored as it provides a clearer picture of underlying price pressures in the economy.
Earlier this year, Europe appeared to be on a steady path towards the ECB’s 2% inflation target, allowing policymakers to hint at potential rate cuts. However, the unexpected inflation uptick may have complicated matters for ECB policymakers.
In the US, the highly anticipated core PCE inflation index held steady at 2.8% year-on-year in May, unchanged from the previous month. This rate, the lowest since March 2021, remains above the Federal Reserve’s (Fed) target of 2%, presenting a nuanced challenge for policymakers. The core PCE index, which excludes more volatile food and energy prices, is the Fed’s preferred measure for gauging underlying inflation trends. Despite a gradual decline from previous highs, core PCE inflation remains persistent.
In the first quarter of 2024, the US economy showed signs of tempered growth, expanding at an annualized rate of 1.3%. This figure fell short of both the initial estimate of 1.6% and the 3.4% growth witnessed in Q4 2023. The primary factor for this downward revision was a significant slowdown in consumer spending, indicating that the US central bank’s strategy of moderating economic expansion through elevated interest rates is affecting consumer behavior.
In May, China’s Manufacturing PMI dipped to 49.5 from April’s 50.4, missing market expectations of 50.5 and falling just below the critical threshold of 50, signaling a shift into contraction territory. However, China’s latest strategic move, the establishment of its third state-backed investment fund worth $47.5 billion, aims to inject fresh momentum into the semiconductor sector and boost manufacturing.