Market Round-Up

Data released by the US Bureau of Labor Statistics shows the US Consumer Price Index (CPI) eased to 4.9% in April, the lowest annual reading in two years and slightly below forecasts of 5%. However, core inflation, which strips out more volatile food and energy costs, remained stubbornly high despite a slight dip in April to 5.5%, having barely moved within the previous 12 months.

This data release fuelled investors’ hopes that the Federal Reserve’s recent decision to raise its benchmark interest rate for the 10^th consecutive time to more than 5% would mark the end of the monetary tightening campaign. US interest rates are currently at the highest level experienced in 16 years and investors have started to predict and price in an almost 0.75% rate cut by the end of the year.

As a result, both US treasuries and Wall Street stocks advanced with the yields on both the two-year and 10-year treasuries falling 0.11% and 0.07%, respectively. The tech-heavy Nasdaq Composite added 1%, closing at its highest level since June, while the blue-chip S&P finished 0.4% higher. The prospect of lower interest rates increases the appeal to investors of companies that promise long-term growth.

The Bank of England (BoE) once again followed the Fed with a 12^th consecutive interest rate rise. The Monetary Policy Committee agreed, by a seven to two majority, to increase UK borrowing costs by 0.25% to 4.45%, the highest level experienced in almost 15 years. The BoE also revised and significantly increased its short-term inflation forecasts with inflation now expected to fall below its 2% target at the beginning of 2025, instead of the previous 12-month prediction.

Despite this, the bank is now estimating that the UK economy will avoid recession relatively comfortably, forecasting a growth of 2.25% in gross domestic product (GDP) by mid-2026. The growth forecast for the UK, however, continued to be weak with annual growth expected to struggle to exceed 1% over the next three years with unemployment expected to rise from 3.8% at present to 4.5% in 2026.

It is estimated that the main effects of the rise in interest rates from 0.1% in December 2021 have not yet been felt by households, with only a third of the impact in place due to the time lag associated with the policy. As a result of the rate hike, London’s FTSE 100 was down 0.4% with traders now anticipating that rates will peak at 4.75% in September, something which is expected to have continued negative impact on business performance.

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