Overview

A common theme in each market commentary introduction over the past few months has been ‘continued economic uncertainty’; this month is no exception, nor can we see that there will be any likely change in the months ahead.

UK

Inflationary pressure remains in the UK with current levels of almost twice the Bank of England’s target. This in turn is putting pressure on the Monetary Policy Committee to increase interest rates. Any rise will have the potential to derail economic recovery – it’s not an easy decision by any means, although speculation in the markets is that we are unlikely to see any increase to the Bank of England’s Bank Rate until January 2012. 

In the latest report on UK consumer prices published by the Office of National Statistics (ONS) on 14th June 2011, the official figures report the all items Consumer Price Index (CPI) at 4.5% for May, unchanged from April. Although unchanged overall, there were significant upward and downward pressures between April and May.

The key items in the latest CPI figure are analysed by the ONS researchers within their May report. By far, the largest downward pressure to the change in CPI inflation came from transport services. A further downward pressure came from furniture, household equipment and maintenance. By far, the largest offsetting upward pressure came from food and non-alcoholic beverages. Of course this will be compounded in next month’s figures by the expected increase in energy prices which are starting to be announced by the energy firms causing even more difficulty for Mervyn King and the Monetary Policy Committee.

Europe

Sovereign debt remains the biggest concern across the Eurozone. 

This week has seen Greece became the lowest-rated country in the world according to Standard & Poor's, which downgraded it on Monday and warned that any attempt to restructure the country's debt would be considered a default.

Greece now has a lower credit rating than countries such as Pakistan and Ecuador, which has been shut out of international markets since a 2009 default. The cost of insuring Greek debt is now almost twice as much as the price of insuring Pakistani bonds.

S&P's move was the latest blow for Greece's Socialist government, which is scrambling to push an unpopular austerity package through parliament to ensure continued funding under a year-old bailout plan.

US

Obama’s visit to the UK may have been a brief distraction from his domestic concerns where consumer confidence has fallen to a six month low according to the Conference Board’s confidence index. Rising food and fuel prices have squeezed personal finances and slowed consumer spending.

Manufacturing remains sluggish and as in the UK, property remains in the doldrums with home prices down 4.2% from the previous three months. According to the report from S&P / Case Schiller, this is the biggest quarter drop since the first quarter of 2009.

All this negative news flow has impacted the dollar with the currency falling steadily against the euro over the month.

Global

China once again holds the headlines in Asia with manufacturing further slowing in May. The slowdown was less than predicted and could be a further indication that China’s economy is heading for a soft landing rather than the crash predicted by some at the start of the year.

China’s economy has become increasingly important in light of the financial crisis in western economies as many countries across the globe have shifted economic reliance towards China. Commodity prices are particularly sensitive to the Chinese economy based on the strength of demand from its manufacturing sector. If some sort of economic correction is unavoidable, a soft landing is certainly the most favorable outcome.

Further afield, and with a close interest in commodities, emerging markets are continuing their growth with Brazil, Malaysia, Russia and South Africa all performing well. The risk of these economies continuing to deliver remains high as wider global economic uncertainty remains.

Once again, caution and uncertainty remain the outlook. May brought few surprises but plenty of mixed news fuelled the economic debate, in particular around inflation and interest rate rises. So what’s in store for the summer months? Probably more of the same.