So now we know

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So now we know July 4th is the day the UK goes to the polls and decides the fates of Mr Starmer and Mr Sunak. This, combined with Wednesday’s inflation data the markets have now decided, is enough to end the prospect of the Bank of England monetary committee cutting interest rates in June. The monthly flash PMIs from around the globe continue to indicate a resilient developed economy but reduce the expectation that Central Bankers are in any hurry to cut interest rates. US 2-year bond yields have headed back close to 5% as the bond markets are now ruling out the possibility of the Fed cuts in June or July, and September is close to the US election, so that may leave at best one cut in December, maybe.

 The correlation between Nvidia and the S&P 500 has been noted by more than one commentator. Many believe that where Nvidia leads, the S&P 500 follows. That correlation broke on Wednesday as Nvidia’s stock rose again on the back of strong AI performance, yet this did not shield the S&P from another lacklustre day. The S&P’s performance seems intertwined with interest rate sentiment.

One notable and possibly surprising reaction to Wednesday’s announcement that Rishi was heading to the palace to dissolve parliament was Sterling’s resilience to the news. The pound has had a better few weeks as economic indicators continued to improve, and it actually had a slight jump on Wednesday, possibly in reaction to the inflation data. It dipped latterly but finished the week roughly where it started. The dollar basket has also rallied this week, so sterling’s strength cannot be put down entirely to a weaker dollar.

Once again, having got all excited about interest rates coming down, equity markets are coming to terms with the idea that Europe may be the only region to ease monetary policy in the developed markets in the coming months. As a result, higher bond yields can dampen equity valuations and increase uncertainty about the economic outlook hence why equities have fallen in the past few days.

Later today, we get a raft of economic sentiment data from the US as we receive the final reading of Michigan consumer sentiment, five-year inflation and consumer expectations, and current conditions for May. Preliminary readings suggested economic sentiment was falling and inflation expectations were remaining above the Fed’s 2% target. Today, readings are unlikely to change that view materially.

Finally, as UK consumer confidence is showing some signs of improving and wages are now rising faster than prices, there was some hope that Rishi may see that reflected in today’s retail sales report. Sadly, that was not the case; there was an expectation that UK retail sales would fall month over month, but not to the extent they did. All sectors suffered as sales fell by 2.3%.