Please see this week’s Weekly Market Commentary from Brooks Macdonald detailing the latest economic and market news:
Equity markets continued their rally last week with the US technology sector surging
Despite a small sell-off in US indices on Friday, last week saw a surge in equity markets, led by the US technology sector yet again. Other regions enjoyed this improved risk appetite with the European index rising just under 1.5% over the course of the week.
US consumer inflation expectations fell over 1-year which will be welcomed by the US Federal Reserve
Last Friday saw the release of the University of Michigan survey which contains inflation expectations over the next year as well as the longer-term views of consumers. With US inflation starting to slow, the 1-year estimates of US inflation fell rapidly compared to the previous month, coming in at just 3.3% versus 4.1% expected and 4.2% last month. These consumer inflation expectations are a very important input to areas such as wage demands and are closely watched by the Fed. Whilst there was good news on the 1-year measure, 5-year consumer inflation expectations remained well above the Fed’s 2% target, at 3%. Lastly, consumer sentiment beat market expectations with a large uptick versus May’s reading. That said, sentiment remains suppressed versus history as consumers brace for possible recession risks.
This week the focus will be on the UK’s inflation data as well as how the Bank of England reacts
This week will see the market’s attention switch to the UK inflation and interest rate outlook with the UK Consumer Price Index (CPI) release coming on Wednesday ahead of the BoE’s latest policy changes on Thursday. In terms of the inflation report, the market expects both UK Core CPI (6.8% year-on-year at the last reading, 6.7% expected this time) and UK Headline CPI (8.7% year-on-year at the last reading, 8.4% expected this time) to come down although both readings are highly elevated. The BoE is then expected to raise its bank base rate from 4.5% to 4.75% on Thursday in response to the higher inflation pressures.
The weekend papers were awash with stories detailing the impact of expected higher UK base rates on mortgage costs. Two-year gilt yields are now at their highest level in 15 years with UK 2-year mortgage rates now above 6% as a result. With inflation, and interest rates, now becoming an even hotter political topic in the UK, investors will be watching the BoE statement on Thursday closely. Over the last 12 months the BoE has raised interest rates but at the same time delivered a balanced message around the need to weigh inflation risks with economic risks. With inflation receding in the US while inflation remains sticky in the UK, there will be increased pressure to deliver a hawkish message on Thursday.
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Andrew Lloyd DipPFS
20/06/2023