Shaw and Partners

US stocks fell over the week, giving up earlier gains as geopolitical tensions escalated. The Dow Jones Industrial Average fell 1.3%, slipping into negative territory for the year while the S&P 500 and the Nasdaq Composite recorded smaller losses and remained in positive territory for the year. Markets had risen through Thursday on upbeat economic data and signs of easing US-China trade tensions, including potential extensions to tariff pauses. However, sentiment reversed sharply Friday after Israel launched airstrikes on Iranian nuclear and military targets, prompting retaliation. The resulting surge in oil prices lifted energy stocks but dragged broader indexes lower, erasing the week’s earlier optimism.

Positive economic data helped support markets earlier in the week. May’s consumer price index (CPI) rose just 0.1% month over month, below expectations, while core inflation remained steady at 2.8%. Producer prices also undershot forecasts, suggesting muted tariff impacts. Bond yields fell on the soft inflation data, boosting Treasuries before pulling back slightly Friday due to Middle East tensions. Business and consumer sentiment improved with the National Federation of Independent Business’ optimism index rising to 98.8, and consumer sentiment climbed to 60.5, helped by easing inflation expectations and stabilising policy outlooks.

European markets fell amid US trade uncertainty and Middle East tensions, with the European STOXX 600 down 1.7%. Germany’s DAX dropped 3.2%, Italy’s FTSE MIB fell 2.9%, and France’s CAC 40 slipped 1.5%, while the UK’s FTSE 100 was flat. The UK economy shrank 0.3% in April, its sharpest monthly drop since October 2023, driven by declines in services and production. Unemployment rose to 4.6%, and wage growth slowed to 5.2%. Eurozone industrial output fell 2.4%, and the trade surplus shrank to EUR 9.9bn. European Central Bank (ECB) officials signalled a possible pause in rate cuts, despite weaker forecasts. Economist Tomasz Wieladek said further cuts may be limited, with ECB nearing the end of its easing cycle.

Japanese markets ended mixed amid rising geopolitical and trade tensions, with the Nikkei 225 up 0.3% and the TOPIX down 0.5%. A stronger yen, driven by safe-haven demand, pressured exporters, while the 10-year government bond yield fell to 1.40% amid tariff concerns. Investors looked to the G7 summit for progress in US-Japan trade talks, though Prime Minister Ishiba stressed the need for a balanced deal. Japan’s Q1 GDP was flat, an upward revision, while April industrial output dropped 1.1%. In China, stocks slipped as deflation persisted, with CPI falling for a fourth month and producer prices declining further. A preliminary US-China trade deal lifted markets midweek, but details remain pending.

Weekly macro highlights

UK GDP contracts in April

UK GDP fell 0.3% month-on-month in April, according to the Office for National Statistics (ONS). This marked the sharpest monthly decline since October 2023 and reversed the 0.2% expansion recorded in March. The decline was led by a 0.4% fall in services output, which accounts for around 80% of total GDP. Industrial production also contracted by 0.6%, though construction output rose by 0.9%, helped by growth in infrastructure. On a three-month basis, GDP increased by 0.7%. Additionally, ONS data revealed the UK labour market continued to soften. The unemployment rate rose to 4.6% in the three months to April, while payroll employment declined by 55,000 in April and a further 109,000 in May. Wage growth eased but remained elevated, with regular pay up 5.2% year-on-year. Chancellor Rachel Reeves said the figures were disappointing and a reminder of the fragility of the UK economy. Reeves noted there was uncertainty about tariffs which weighed on exports and production.

US inflation eases slightly in May

US CPI inflation rose by 0.1% month-on-month in May, following a 0.2% increase in April. On an annual basis, the inflation rate edged up to 2.4% from 2.3% in April. Core CPI, which excludes food and energy, increased by 0.1% month-on-month and remained steady at 2.8% year-on-year. Shelter inflation rose by 0.3% month-on-month and contributed the largest share to the monthly headline increase. Food prices rose 0.3%, while energy prices fell 1.0%, driven by a 2.6% decline in gasoline prices. Within core goods, used car prices, apparel and medical care services posted declines. The moderation in both headline and core inflation supports expectations that price pressures are gradually easing. Despite recent tariff announcements, the CPI release showed no immediate inflationary impact. In a separate report, initial jobless claims were broadly stable at 229,000 for the week ending June 07, while the four-week moving average stood at 230,250.

RBI cuts interest rates in June

The Reserve Bank of India (RBI) cut its policy repo rate by 50bps to 5.5% at its meeting on 06 June. The RBI also lowered the cash reserve ratio, by 100bps to 3.0%, to support banking system liquidity and credit growth. It also shifted its policy stance from accommodative to neutral. The decision was unanimous among members of the Monetary Policy Committee (MPC), as inflation has moderated more than expected. India’s headline CPI inflation declined to 2.82% in May, its lowest level since 2019, driven by falling food prices, stable energy costs, and softer core inflation. The RBI now projects inflation to average 3.7% in FY2025–26, comfortably within its 2–6% target range. The MPC maintained its FY2025–26 GDP growth forecast at 6.5%, citing resilient domestic demand, a recovery in private investment, and improving rural consumption. The MPC acknowledged uncertainties related to global trade and commodity prices.