Indices 

The promising advancements in artificial intelligence are instilling a sense of hope regarding the future productivity of businesses. These advancements are also having a significant positive impact on the stock market, as evidenced by the substantial rise in the largest tech index in the United States last week. Moreover, the outperformance of tech companies played a major role in the other two major US indices. In Europe, stocks made gains fueled by the optimistic belief that interest rates may soon reach their peak and that the United States would avoid a debt default. The pan-European STOXX Europe 600 Index concluded the week with a 0.72% increase when measured in local currency. Among the major markets, Germany’s DAX experienced a notable surge of 2.27%, while the UK’s FTSE 100 Index recorded only marginal gains last week.

Forex

In the early European trading session on Friday, the U.S. dollar experienced a slight decline but remained close to a two-month high. This was attributed to robust labor data and growing optimism that a potential U.S. debt default could be avoided, indicating that the Federal Reserve might maintain its tight monetary policy for a longer duration. Concerns surrounding the U.S. banking sector seem to have diminished, and recent inflation data has shown resilience. Additionally, Thursday’s jobless claims indicated a labor market that remains constrained, as the number of Americans filing new claims for unemployment benefits dropped more than anticipated. As a result, the USD/JPY pair declined by 0.4% to 137.95 following the release of data revealing that Japanese consumer inflation had reached a 40-year high in April, exerting pressure on the Bank of Japan to reconsider its ultra-loose monetary policy.

Macro

UK:
Bank of England (BoE) Governor Andrew Bailey restated during his speech that monetary policy would need to tighten further if there were indications of more persistent inflationary pressures. He anticipated a significant slowdown in inflation starting from April as the annual calculations no longer incorporate energy price hikes. However, Bailey emphasized that policymakers still considered the risks to inflation to be largely skewed to the upside. He noted that unwinding the second-round effects of inflation would take longer than their initial emergence.

According to the national statistics office, the UK’s unemployment rate inched up to 3.9% in the three months leading up to March, compared to 3.8% in the preceding three months. However, wage growth remained relatively steady during the period, with average weekly pay excluding bonuses increasing by 6.7% compared to the previous year’s figures, up from 6.6%.

EU:
Official data further indicated a potential slide into an industrial recession in Europe. Eurozone industrial production contracted by 4.1% on a sequential basis in March, following a 1.5% increase in February. Year-on-year, industrial output declined by 1.4% after a 2.0% expansion in the previous month.

In Germany, the ZEW economic research institute reported a third consecutive monthly decline in investor sentiment in May. The sentiment index entered negative territory for the first time since the end of 2022, driven by concerns about rising interest rates. ZEW President Achim Wambach warned that Germany could experience a mild recession.

The European Commission revised its forecasts for economic growth in the eurozone, projecting an increase for this and the next year while predicting persistently high inflation. The latest projection anticipates a gross domestic product (GDP) expansion of 1.1% in 2023 and 1.6% in 2024, up from the previous estimates of 0.9% and 1.5% growth, respectively. Wage increases are expected to contribute to higher inflation, with estimates of 5.8% in 2023 and 2.8% in 2024, revised from the previous figures of 5.6% and 2.5%, respectively.

US:
The primary driver behind the week’s market gains seemed to be a notable change in the tone surrounding the negotiations on the debt ceiling. Following a meeting at the White House on Wednesday, President Joe Biden expressed confidence in avoiding a default, while Republican House Speaker Kevin McCarthy described reaching a deal as “doable,” and Democratic Senate Leader Chuck Schumer emphasized the necessity of a bipartisan agreement.

While much of the economic data released during the week aligned with consensus expectations, investors appeared to react to certain unexpected outcomes. Retail sales in April increased by 0.4%, falling below consensus expectations and marking the slowest year-over-year growth (1.6%) since the early stages of the pandemic. Considering that the data is reported on a nominal basis and the consumer price index rose by 5.5% during the same period, real spending, adjusted for inflation, experienced a sharp decline.

On the other hand, industrial production in April rose by 0.5%, surpassing expectations of a flat reading, with the increase partially driven by heightened auto manufacturing activity. The week also revealed surprising resilience in the labour market. Weekly jobless claims came in at 242,000, below expectations and lower than the previous week’s figure of 264,000, which had been the highest level since late 2021. Additionally, continuing claims reached their lowest level in nine weeks.