US stocks at record highs

Amid a notable firming of Fed rate cut expectations, US bond yields fell sharply, US stocks rallied strongly, and the dollar lost considerable ground over the course of last week. The latter shed around 2 and 2.5 cents against the euro and sterling respectively, falling to its lowest levels since late 2021, and is trading at around $1.1740 and $1.3720 at the start play this week. EURGBP traded in a narrow range either side of £0.8550 for much of last week and is hovering just above this level this morning. It’s a busy enough week ahead for economic data, including the key jobs report in the US on Thursday.

With signs that US economic growth is slowing, expectations for Fed rate cuts hardened last week as the market priced in an additional 15bps or so worth of policy easing over the remainder of this year. This contributed to a decline in US bond yields, led by the short-end of the curve, with 2- and 10-year yields ending 15bps and 10bps lower on the week respectively. Equivalent UK yields fell by around 8bps and 4bps respectively, while German 2-year yields were flat on the week with 10-year yields rising by about 7bps.

Lower US bond yields supported a strong rally in US equity markets. The S&P 500 and the Nasdaq both closed out Friday at new all-time highs on the back of gains of around 3.5% to 4% over the week. European stocks followed the US some of the way higher, chalking up weekly gains of just under 2%. Donald Trump threw a potential curve ball into proceedings late on Friday when he said he was ending trade negotiations with Canada because of the latter’s imposition of a digital sales tax (which would have hit US tech companies), though Canada has now said it will rescind the tax, allowing trade talks to continue.

Consumer spending in the US declined in the month of May according to data published on Friday, falling by 0.3% in real terms from April, with the annual increase in spending slowing to 2.2% from 2.9% the previous month (and from over 3% at the end of last year).  Meanwhile, consumer price inflation on the Fed’s target measure nudged up in May (not unexpectedly), with headline and core PCE inflation coming in at 2.3% and 2.7% respectively (from 2.2% and 2.6% in April).

Looking to the week ahead, economic data due include a flash reading for Euro area inflation in June tomorrow (Tuesday) and the latest ISM surveys of manufacturing and services in the US on Tuesday and Thursday respectively, though the key release will be the US jobs report for June on Thursday. The ECB’s annual Forum on Central Banking kicks off today, so we’ll hear from a host of central bankers over the coming days.