UK inflation falls back to 2% target, but will it be enough to turn the BoE?

Another relatively unimpressive start for European markets has seen the FTSE 100, DAX and CAC all trading lower in early trade. This represents a continuation of the selling pressure that has dominated the past month, with the FTSE 100 and DAX both 3% lower over the period. The French CAC once again finds itself at the bottom of the pile, with Goldman Sachs warning that a Le Pen victory would see the country’s debt burden swell to the highest level since 1950. The plan to increase public spending and lower taxes may sound great to the electorate, but such a move would likely cause shockwaves through the financial system.

UK inflation data brought something for everyone, as a return to the 2% target came alongside a higher-than-expected core figure that stands at a lofty 3.5%. Services sector inflation remains the thorn in the side of the BoE, with the 5.7% CPI figure for the sector serving to overshadow the -1.3% decline in goods prices over the year to May. Unfortunately, there is a strong likeliness that this 2% CPI figure represents the bottom for now, with base effects signalling a potential rise for headline inflation over the next two months. All eyes turn to the Bank of England, who will have to decide whether today’s decline to 2% inflation will justify a surprise rate cut that markets price at a 37% possibility. With just two of the nine MPC members voting for a rate cut last month, a decision to cut rates tomorrow would mark a significant shift in standing which seems unlikely given the hot services inflation rate. With Rishi Sunak having called an early election off the back of last month’s inflation decline, there is little doubt that the Conservatives will be watching closely to see if the MPC will help give their reelection hopes a boost by cutting interest rates for the first time in over four-years.

Looking ahead, all eyes will be on Nvidia after the tech giant overtook Microsoft to become the world’s most valuable company. Much has been made of the deterioration in market breadth, with outperformance from the tech sector helping to paper over the cracks seen elsewhere. Nonetheless, this is the unique selling point of the US indices, with the persistent growth capabilities of the Mag7 stocks helping to build a narrative to convince investors to favour US indices. With the Dow seeing a 3% decline that matches the performance of the DAX and FTSE 100 over the past month, it is clear that the record highs seen for the Nasdaq and S&P 500 have primarily been driven by Nvidia alone (44% up over the past month).