Market Update

US stocks ended the week broadly higher, with the S&P 500 and Nasdaq reaching record highs, fueled by encouraging inflation data and a steady approach from the Federal Reserve on interest rates.
In contrast, UK stocks struggled to gain traction, while European markets faced declines. The STOXX Europe 600 Index fell 2.40%, weighed down by political uncertainty, a cautious US Federal Reserve outlook, and disappointing economic data. France’s CAC 40 plummeted over 6.2% this week after President Emmanuel Macron announced snap parliamentary elections. Concerns over the potential for a far-right government and a robust left-wing opposition have unsettled European financial markets.
Investors are now eyeing the release of the UK Consumer Price Index (CPI) and the Bank of England’s upcoming interest rate decision next week, the last major economic event before the general election on July 4.
The week’s highlight was Wednesday’s release of the US CPI report and the Federal Reserve’s interest rate announcement.
May's inflation data brought optimism to markets, showing signs of a slowdown. Consumer prices rose 3.3% year-over-year, slightly below the previous month's 3.4% and market forecasts. Core inflation, excluding food and energy, eased to 3.4%, compared to expectations of 3.5%. However, shelter inflation, a significant CPI component, remained a concern. Monthly shelter costs rose 0.4% and were up 5.4% year-over-year. Analysts suggest that declining rents may eventually reflect in official inflation metrics.
This data suggests inflation may be resuming its downward trend after a temporary pause earlier this year, which had complicated policymakers' efforts to ease monetary policy. Just hours later, the Federal Reserve announced it would hold interest rates steady at 5.25%-5.5%.
Earlier in the year, officials anticipated three rate cuts in 2024, but slower-than-expected inflation progress has led to revisions, now projecting just one cut. The Fed's Dot Plot revealed a more aggressive rate-cutting outlook for 2025, with four reductions totalling a full percentage point. Chair Jerome Powell emphasized the need for sustained improvements in inflation data to build confidence in achieving the 2% target. He noted that labor market conditions have improved, describing them as tight but not overheated.
In Japan, the Bank of Japan signaled a shift toward monetary tightening, announcing plans to scale back bond purchases. A detailed strategy to reduce its $5 trillion balance sheet will be unveiled next month. Governor Kazuo Ueda hinted at a possible interest rate hike in July, despite economic headwinds such as declining consumption and the impact of a weakened yen on rising import costs.