On Thursday, the Bank of England, implemented a 50 basis point interest rate hike (pushing the lending rate to 5%), surprising markets that had priced in a 60% chance of a 25 bps hike. Following the decision, markets saw a nearly 50% chance that Bank Rate would peak at 6.25% by the end of this year. The move comes after U.K’s May inflation figure was published on Wednesday, which showed that inflation in the region remains stubbornly high, with core inflation rising to its highest level since 1992. Headline inflation defied predictions, coming in at 8.7% y/y vs 8.4% expected, keeping in line with April’s figure. Core inflation jumped 7.1% y/y, up from 6.8% in April. In May, the central bank forecasted that inflation would drop to just over 5% by year end and be below its 2% target in early 2025.

Keeping with the inflation theme, U.S. Federal Reserve Chair Jerome Powell stated this week, while addressing the Senate Banking Committee, that more rate hikes may be needed this year. Powell additionally mentioned that policymakers feel “it will be appropriate to raise rates again this year, and perhaps twice,” if the economy performs about as expected. Decisions will be made on a meeting-by-meeting basis, Powell said, while noting that there is a long way to go to get inflation back down to its 2% goal.

The latest release of flash purchasing managers index’s (PMI) data on Friday indicates a stagnation in the eurozone economy. The composite S&P Global PMI registered at 50.3. The manufacturing index declined from 44.8 in May to 43.6, while the services measure experienced a significant monthly deterioration, dropping from 55.1 to 52.4, which is an unusually substantial decrease.

On Saturday, Russian President Vladimir Putin made a firm commitment to mete out consequences to those responsible for an “armed uprising” following the apparent insurrection led by the head of the Wagner private military group – which threatened to end Putin’s 24-year rule. The insurrection involved taking control of military installations in two Russian cities, namely Rostov-on-Don and Voronezh, and included a warning that the troops could advance towards Moscow. In a sudden change of direction, Yevgeny Prigozhin, the leader of Wagner, announced that he had halted the advance of his troops towards Moscow and issued orders for them to evacuate Rostov. As part of a negotiated agreement facilitated by Belarus, Prigozhin agreed to depart from Russia and relocate to Belarus. In a statement, Prigozhin said that he wanted to avoid the spilling of “Russian blood”.

This week, the yen continued to depreciate against other major currencies, crossing the 143 mark against the dollar, coinciding with Japan’s announcement of its highest core inflation rate since 1981, standing at 4.1%. While other central banks adopted a more hawkish stance, the Bank of Japan maintained its super loose monetary policy approach. If the yen experiences further decline, it may necessitate adjustments to the Bank of Japan’s yield curve control policy.

No major indicators were released in China during the week. However, mounting evidence that the country’s recovery is losing steam raised fresh concerns about the economic outlook. China’s People’s Bank of China was the lone major central bank to lower rates this week, cutting the important loan prime rate 0.1% to 4.2% in an effort to lower borrowing costs and boost confidence and consumption.

On the market front, global indices ended the week in the red. Growth stocks outperformed value shares, while large-caps fared better than small-caps. The S&P 500 Index fell -1.39%, while the Dow Jones slipped -1.67%. The technology-heavy Nasdaq Composite had a strong start to the week but ended the week down -1.44%. Shares in Europe (Euro Stoxx 50, -2.80%)  and the UK (FTSE 100, -2.37%) fell over the week on worries that further interest rate increases might cause a recession in Britain and the eurozone.

Chinese shares (the Shanghai index) ended the week down -2.30%, while in Hong Kong, the benchmark Hang Seng Index declined -5.74%, its largest drop in three months. In Japan, the Nikkei 225 fell -2.74%. Gold dipped -1.84% while Brent Oil declined by -2.52% over the week.

In May, the inflation rate witnessed a notable decrease, reaching its lowest annual level in over two years, as reported by the Labor Department. The consumer price index rose by only 0.1% during the month, resulting in a decline in the annual rate from 4.9% in April to 4% in May. While there has been some easing of price pressures, core inflation, which excludes volatile food and energy prices, increased by 0.4% for the month and remained 5.3% higher than the previous year.

At the wholesale level, US inflation has also experienced a decline, falling well below its pre-pandemic average. The Producer Price Index data released by the Bureau of Labor Statistics shows a modest 1.1% annual increase for the 12-month period ending in May, a sharp drop from the 2.3% growth recorded in April. This marks the lowest annual level since December 2020, with energy and food prices playing a significant role in the decline. On a monthly basis, prices saw a 0.3% decrease, reflecting the fourth decline in six months.

Despite these fluctuations, US retail sales demonstrated resilience and growth in May, defying expectations of a decline. The Commerce Department reported a 0.3% increase in retail sales across various outlets, including physical stores, online platforms, and restaurants, compared to April. This positive trend underscores the vital role of consumer spending in fuelling the economy. While gasoline stations and miscellaneous stores experienced a decrease in sales, spending grew in other categories. Excluding gasoline station sales, retail spending showed a stronger increase of 0.6%, with building materials and gardening items experiencing the highest surge of 2.2% in May. Overall, retail sales rose by 1.6% compared to the previous year.

Amid these economic developments, the Federal Reserve made the decision to keep interest rates unchanged, opting to assess the impacts of the previous 10 hikes. The positive inflation data likely helped investors absorb a somewhat hawkish outlook from Fed policymakers. On Wednesday, officials announced that the official federal fund’s target rate would remain steady within the 5.00% to 5.25% range. However, the rate projections indicated by the “dot plot” suggested that this decision was more of a temporary “skip” rather than a long-term “pause,” as the median projection indicated the possibility of two additional quarter-point rate hikes by the end of the year.

The UK economy showed signs of recovery with a 0.2% sequential growth in April, following a contraction of 0.3% in March, driven by increased output in consumer-facing services, car sales, and education. This, combined with stronger-than-expected labour market data, including a 7.2% annual average wage growth and a decline in the unemployment rate to 3.8%, supported market expectations that the Bank of England (BoE) would continue its plan of raising interest rates in July. BoE Governor Andrew Bailey acknowledged the tightness of the labour market and expressed his belief that although inflation would eventually decrease, the process would take longer than initially anticipated.

In the Eurozone, industrial production rebounded more than anticipated in April, showing resilience after a decline in March, according to data released by Eurostat. The surge in output of capital goods, such as buildings and equipment, offset the reduced production of consumer goods. The eurozone experienced a notable 1.0% month-on-month increase in industrial production, resulting in a 0.2% year-on-year rise, surpassing economists’ expectations of 0.8% monthly and annual increases. Notably, capital goods output witnessed a remarkable 14.7% month-on-month increase, reversing the previous month’s 15.2% decline. However, the production of durable consumer goods declined by 2.6%, and non-durable goods saw a 3.0% decrease during the same period.

Concurrently, the European Central Bank (ECB) raised its key deposit rate to 3.5%, reaching its highest level in 22 years. ECB President Christine Lagarde expressed the view that further tightening of borrowing costs may occur in July unless there are significant changes in the economic outlook. The ECB also revised its inflation forecasts upward, supporting the case for continued monetary tightening, while reducing its projections for economic growth. Additionally, as part of its strategy to reduce its balance sheet, the ECB confirmed the cessation of reinvestments from its asset purchase program starting in July.

China’s economy encountered challenges in May as industrial output and retail sales growth fell short of expectations, further raising concerns about the stability of the post-pandemic recovery. The slowdown in economic momentum during the second quarter has prompted China’s central bank to implement its first key interest rate cuts in almost a year, indicating the need for additional measures to support the economy. Industrial output grew by 3.5% in May, slower than the previous month and below analysts’ expectations, reflecting manufacturers’ struggles with weak domestic and international demand. Similarly, retail sales, a crucial indicator of consumer confidence, rose by 12.7%, missing forecasts and decelerating compared to April’s growth rate of 18.4%.

US stocks displayed a robust performance during the week, with the S&P 500 Index achieving its longest stretch of daily gains since November 2021 and its strongest weekly performance since the end of March. The tech-heavy Nasdaq surged by +3.25% over the week, while the S&P 500 and the Dow Jones also exhibited significant gains of 2.58% and 1.25% respectively. In Europe, both the Euro Stoxx 50 and FTSE 100 closed the week positively, registering gains of +2.45% and +1.06% respectively. Chinese stocks followed suit, driven by expectations of additional stimulus measures to support industries experiencing a slowdown in the wake of the waning post-pandemic recovery. The Shanghai Composite Index climbed by +1.30%, and the Hang Seng Index saw a notable increase of +3.18%. Meanwhile, Japan’s Nikkei 225 concluded the week on a higher note, recording a weekly market movement of +4.47%. The markets’ upward trajectory, reaching their highest levels in over three decades, was reinforced by the Bank of Japan’s (BoJ’s) decision to maintain its accommodative monetary policy, a widely anticipated move.

On Thursday, the S&P500 index experienced a significant development as it entered a bull market. The broad equities benchmark demonstrated a 0.6% increase, concluding the day at 4,292.93 points. This surge represents a notable 20% leap from its lowest point on October 12, 2022, when it stood at 3,577.03 points. Investors reacted favourably to indications from the Central Bank, which suggested that it is nearing the conclusion of its interest rate hiking cycle. Last week, the Federal Reserve hinted that it is likely to abstain from implementing a rate hike during its June 13-14 meeting. This anticipated pause has acted as a catalyst, propelling stock prices to higher levels.

On Thursday, the US Labour Department reported that weekly jobless claims had unexpectedly increased this week to 261,000, well above expectations and the highest level since October 2021.

Economists at the World Bank have revised their global GDP forecast for 2023, increasing it from the earlier projection of 1.7% to 2.1%. This upward adjustment indicates an improvement; however, it also suggests a significant deceleration compared to the 3.1% growth rate observed in 2022. In addition, the World Bank has reduced its growth outlook for 2024 from 2.7% to 2.4%.

While major economies have exhibited more resilience than anticipated in 2023, the economists caution that the impact of higher interest rates and tighter credit conditions will likely dampen growth in 2024. These factors are expected to take a toll on economic expansion going forward.During a meeting at the White House, US President Joe Biden and UK Prime Minister Rishi Sunak reached an agreement to initiate negotiations on a trade pact between their countries. This trade agreement holds the potential to benefit British automakers by allowing them to qualify for electric car subsidies. Furthermore, it could facilitate the joint development of advanced weaponry. The focus of the trade discussions would revolve around critical materials that play a vital role in the production of batteries used in electric vehicles. The proposed trade package aims to foster collaboration and strengthen economic ties between the US and UK.

According to revised GDP data, the Eurozone’s economy experienced a technical recession during the winter period, albeit by a small margin. The data reveals that the economy contracted by 0.1% in both the fourth quarter of 2022 and the first quarter of this year. This weak growth performance is not unexpected, considering the significant impact of the war in Ukraine on European energy markets.

In Japan, revised figures released this week by the Cabinet Office indicates that the economy experienced stronger growth than initially estimated during the first quarter of 2023. Gross domestic product (GDP) expanded at an annualized rate of 2.7% quarter on quarter, surpassing the initial reading of 1.6% and exceeding economists’ forecasts. The upward revision of first-quarter GDP can be largely attributed to robust corporate investment. Despite apprehensions surrounding a slowdown in global growth, particularly in China, businesses in Japan demonstrated increased spending as sentiment remained resilient.

Saudi Arabia has announced its intention to implement an additional reduction of 1 million barrels per day in oil supply during July. This decision has been prompted by a decline in crude prices and will bring the country’s production to its lowest level in several years. Despite the potential consequences, this bold step has been taken by Saudi Arabia, which holds significant importance as a member of the OPEC+ coalition, with the aim of stabilizing the market.

However, it is important to note that this move does involve some concessions to key allies. Russia, a prominent member of the coalition, has not committed to further output cuts. Additionally, the United Arab Emirates (UAE) has negotiated a higher production quota for the year 2024. Despite these compromises, Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, has expressed a strong commitment to taking whatever measures are necessary to restore stability to the market. Brent Crude Oil closed the week lower, down 1.65% to $74,94 bbl.

Chinese equities ended the week on a mixed note, following the release of the latest inflation data, which has increased concerns surrounding the post-pandemic recovery, China’s CPI rose 0.2% in May.  The recent release of weak export and import data has fuelled expectations for increased economic stimulus in China. The data indicates that both domestic and international demand remain subdued. In May, exports experienced a significant decline of 7.5% compared to the previous year, surpassing initial forecasts for a weaker performance. Additionally, imports fell by 4.5% compared to the same period last year. Notably, China’s share of US goods imports in April reached its lowest level since 2006, as reported by The Wall Street Journal. Analysts are concerned that exports may further decline, despite their current elevation compared to pre-COVID levels.

The Shanghai Composite index posted a modest gain of 0.04% for the week, while Hong Kong’s Hang Seng Index extended the previous week’s gains, posting a strong 2.32% week-on-week return.

US stocks ended the week slightly higher, with the S&P 500 up 0.39%, the Dow Jones Industrial Average up 0.34%, and the tech heavy Nasdaq Composite rising slightly 0.14%. The Euro Stoxx 50 ended the weak lower (-0.78%), while the FTSE 100 (0.96%) closed the week in positive territory. Japan’s Nikkei 225 index gained 2.35% this week, continuing its positive trend for the year (23.65% YTD).

Market concern eased late in the week, with investors less worried that the U.S. Department of the Treasury will default on its debt in early June. On Thursday, investors were buoyed by comments from Speaker of the House of Representatives Kevin McCarthy, who said he hopes to have legislation raising the debt cap on the House floor in the week ahead. Then on Friday morning the high stakes talks over raising the debt limit appeared to stall before resuming in the Capitol on Friday evening. One of the toughest sticking points in the talks has been the question of spending caps, a key Republican demand but a red line for a significant bloc of Democrats.

US retail sales rose 0.4% in April, after falling by 0.7% the prior month and below consensus expectations at its slowest year-over-year pace (1.6%) since early in the pandemic. Core sales, which strip out sales of autos, gasoline, building supplies and food services, rose 0.7%, beating expectations for a 0.3% rise while industrial production rose 0.5% in April, well above expectations, driven in part by increased auto manufacturing.

Shares in Europe advanced amid optimism that interest rates could be close to peaking and that the U.S. would avoid a debt default. In local currency terms, the pan-European STOXX Europe 50 Index ended the week 1.79% higher while the UK’s FTSE 100 Index was flat on the week.

The European Commission raised its forecasts for eurozone economic growth this year and next, while predicting that inflation would remain stubbornly high. The latest projection calls for gross domestic product (GDP) to expand 1.1% this year and 1.6% in 2024, up from the previous forecast for growth of 0.9% and 1.5%, respectively.

The UK’s unemployment rate crept up to 3.9% in the three months through March, from 3.8% in the three months through February, the national statistics office said. However, wage growth showed little signs of easing over the period. Average weekly pay excluding bonuses rose to 6.7% compared with a year earlier, from 6.6%.

Ukrainian President Volodymyr Zelenskyy arrived Saturday in Japan for diplomatic talks with leaders of the world’s most powerful democracies participating in the Group of Seven (G-7). The G-7 have so far decided against imposing a near-outright ban on exports to Russia and will instead look to widen existing sanctions and restrictions on key Russian sectors, such as manufacturing, construction, transportation and business services.

According to the final presidential election results announced by the Supreme Election Court, the incumbent President Recep Tayyip Erdogan received 49.5% of the vote in the first round of voting in Turkey’s presidential election last Sunday versus 44.9% for his main opponent, Kemal Kilicdaroglu. The voter participation rate was high, as expected, with about 88%, or over 56 million voters, casting ballots. Erdogan is expected to defeat opposition leader Kemal Kilicdaroglu in the runoff between the two on Sunday, 28 May.

U.S. equities were higher this week, with the S&P 500 Index gaining 1.65%, and the Nasdaq Composite gaining 3.04%. It was the best weekly performance since March for both indexes, while the Dow added 0.38%.

Japanese equities reached their highest levels this week since its equity market burst in 1989. Improved corporate governance, solid domestic earnings and renewed interest on the part of foreign investors have bolstered share prices so far in 2023 while Q1 GDP growth of 1.6% doubled economists’ forecasts. The benchmark Nikkei 225 Index gained 4.8% for the week.

In China, official data showed industrial output, retail sales, and fixed asset investment grew at a weaker-than-expected pace in April from a year earlier. Nevertheless, the Shanghai Stock Exchange Index managed a gain of 0.34% for the week while in Hong Kong, the benchmark Hang Seng Index declined 0.90%.

Following a report released by the Labor Department on Wednesday, the U.S. consumer price index (CPI), a widely recognized measure of inflation that assesses the cost of a diverse range of goods and services, showed a monthly increase of 0.4%. This figure aligns with the estimated value provided by Dow Jones. On an annual basis, the increase amounted to 4.9%, slightly lower than the projected 5% and marking the slowest pace since April 2021. In comparison, the annual rate in March stood at 5%. Additionally, core CPI, which excludes the volatile food and energy categories, saw a monthly increase of 0.4% and a 5.5% increase from the previous year, in line with expectations.

In a separate report this week, the Labor Department revealed that the producer price index (PPI), a metric that measures prices for final demand goods and services, experienced a 0.2% increase, slightly below the Dow Jones estimate of 0.3%, following a 0.4% decline in March. Excluding food and energy, the core PPI also rose by 0.2%, aligning with expectations. On an annual basis, the headline PPI increased by 2.3%, down from 2.7% in March and representing the lowest reading since January 2021. However, despite the PPI rise being less than expected, the services index displayed a notable increase of 0.3%, the biggest move since November 2022, according to the report from the Bureau of Labor Statistics.

The Bank of England raised interest rates by 0.25% to reach 4.5% in response to persistent inflationary pressures, indicating the need for further policy tightening. Alongside this decision, the bank expressed confidence in the United Kingdom’s ability to avoid a recession this year. This marks the 12th consecutive increase in borrowing costs by the monetary policy committee (MPC), representing the bank’s most assertive rate-hiking cycle since the 1980s, driven by the goal of curbing double-digit inflation in the UK. Despite a slight decrease in March that fell below expectations, the inflation rate has remained stubbornly high at 10.1%, the highest among G7 nations. The Bank of England has adjusted its inflation forecast, now projecting it to surpass 5% by year-end, compared to the below 4% estimate made in February. This adjustment is attributed to elevated food prices, experiencing their fastest annual growth since 1977, and a resilient job market. Currently, market expectations point to the Bank of England’s terminal rate ranging from 4.75% to 5%.

China experienced its slowest consumer inflation growth in over two years in April, with the consumer price index (CPI) rising by 0.1 percent year-on-year, according to the National Bureau of Statistics (NBS). This reading represents the lowest rate since February 2021. In March, China’s inflation rate eased to 0.7 percent after reaching a recent peak of 2.8 percent in September. Core inflation, which excludes food and energy, remained unchanged at 0.7 percent year-on-year and 0.1 percent month-on-month. On the other hand, the producer price index (PPI), which indicates the prices charged by factories to wholesalers, experienced its most significant decline since May 2020. It fell for the seventh consecutive month, missing expectations, with a year-on-year decrease of 3.6 percent in April, compared to a 2.5 percent drop in March.

The performance of major indexes was mixed for the week, coinciding with the conclusion of first-quarter earnings reports. The Nasdaq Composite, which has a heavy focus on technology stocks, outperformed its counterparts, recording an increase of +0.4%. This was largely attributed to Google’s parent company, Alphabet, which announced a new artificial intelligence-based search platform. On the other hand, the Dow Jones Industrial Average, which is more narrowly focused, struggled and was weighed down by Disney’s disappointing report of a decline in subscribers to its streaming platform, Disney+. As a result, the index declined by -1.1%. Similarly, the S&P 500 experienced a decrease of -0.29% over the week. In Europe, the Euro Stoxx 50 and FTSE 100 indexes also ended the week with negative movements of -0.52% and -0.31% respectively. Across Asian-Pacific markets, there was a mixed trend. Hong Kong’s Hang Seng Index experienced the most significant decline with a weekly movement of -2.12%, followed by mainland China’s Shanghai Composite, which fell by 1.86%. In contrast, Japan’s Nikkei index recorded positive gains of 0.79% for the week.