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By Wesleyan

May market update - UK stock market hits record high

financial planning
4 min
Professional woman sat at desk with computer in office concentrating on papers

The FTSE 100 hit a record high while the British economy grew more than expected.

After hitting a record high earlier in May, the FTSE 100 fell after disappointing inflation figures pushed back market expectations for the Bank of England’s first interest rate cut. While inflation dropped to 2.3% in April, nearing the central bank's 2% target, economists had expected it to fall to 2.1%.

Policymakers maintained interest rates at a 16-year high of 5.25% but suggested that rate cuts are on the horizon. They believe inflation is on course to hit its 2% target and could fall to 1.6% in two years, opening the door to further cuts in interest rates.

Prime Minister Rishi Sunak announced a snap general election, but markets were barely affected. Despite some possible short-term uncertainty, the election is unlikely to have a significant impact on the overall market in the long term.

In a positive development for the government ahead of the general election, the UK has exited recession with its fastest growth in two years. The economy grew by 0.6% in the first quarter of this year, exceeding expectations. It comes after the economy shrank in two successive quarters – which represents a technical recession – at the end of last year.

Annual growth in average weekly wages, including bonuses, increased by 5.7% in the three months to March. However, there are signs of a cooling labour market, with the unemployment rate rising to 4.3% from 4.2% in the previous three months.

US inflation cools

Markets were buoyed as US inflation finally cooled in April after three consecutive elevated readings, offering some relief for consumers. The consumer price index (CPI) rose at an annual rate of 3.4% in April, down from 3.5% the previous month. Inflation has fallen sharply since peaking at 9.1% almost two years ago but has become a key issue in the run-up to November’s presidential election, with the economy a top factor for voters.

The US Federal Reserve (Fed) held interest rates steady at 5.25% to 5.5%, which is their highest level since 2007, amidst persistent inflation. Fed Chair Jerome Powell stated that inflation remains too high and rate cuts will not occur until there is greater confidence price growth is moving towards the 2% target. Some economists have suggested that if inflation continues to cool the Fed could cut rates twice this year.

US job growth stalled, and unemployment edged up, suggesting a potential slowdown in the economy. Employers added 175,000 positions in April, while the unemployment rate rose from 3.8% in March to 3.9%. Average hourly earnings rose 3.9% in the 12 months to April, which is slower than the previous month. US retail sales were unexpectedly flat in April as higher gasoline prices hit spending other goods, suggesting that consumer spending was losing momentum.

Europe stocks soar

European stocks reached new highs as the euro area emerged from recession in the first quarter of the year. The region's GDP increased by 0.3% in the first quarter compared with the previous three months, following a decline of 0.1% in the last two quarters of 2023.

Germany’s economy expanded by 0.2% in the first three months after shrinking 0.5% at the end of last year. The euro area's second-largest economy, France, grew by 0.2%, while Spain was one of the leading performers with 0.7% growth. Employment across the region rose by 0.3% in the first quarter, while industrial production in March was better than expected.

Inflation data has raised hopes the European Central Bank (ECB) will cut rates. The annual rate of price growth across the euro area held steady at 2.4% in April, just above the ECB's 2% target. Core inflation, which excludes volatile food and energy prices, dropped from 2.9% to 2.7%, marking its lowest level since the onset of the Ukrainian conflict.

This fall has been achieved without an increase in joblessness. The EU’s unemployment rate was 6.1% in the first quarter of the year, just above its lowest since the turn of the millennium. The fall in inflation has led to speculation that the ECB may cut its benchmark rate in June from its current record high of 4%.

China trade war intensifies

US President Joe Biden intensified the trade war with China by imposing significant new tariffs on Chinese electric vehicles, advanced batteries, solar cells and other goods. The White House said $18 billion of Chinese goods would be affected by the rises, in a move that is likely to increase friction between the world’s two largest economies.

China introduced new measures to support its struggling property sector after recent figures revealed a nearly 10% drop in housing prices since the beginning of the year. These measures include encouraging local governments to purchase real estate and easing mortgage regulations.

In a positive development for the world’s second-largest economy, exports in April rose by 1.5% in dollar terms compared with the previous year, reversing a decline in March, while imports increased by 8.4%. The data confirms global demand is strengthening, which should help boost domestic growth.

Other Asian trading nations, including South Korea and Taiwan, also saw overseas sales climb last month on strong US demand. China’s economy grew more than expected at the start of the year, with GDP expanding by 5.3% in the first quarter of 2024 compared with a year earlier.