Stock markets fell back last week, on the back of interest rate rises from several Central Banks. The Bank of England was chief amongst these, raising interest rates by 0.5% to 5%. This move higher in rates followed a higher-than-expected UK inflation number. Although stock markets struggled on this news, they still remain in positive territory for the month of June and comfortably ahead for the year. This week the focus remains very much on inflation, with numbers due out of both the US and the Eurozone.
Last week
- Stock markets fell on the back of tighter monetary policy
- The Bank of England hiked interest rates to 5% as inflation remained at 8.7%.
- UK stock markets sold off, with domestic shares hardest hit
- Government bonds welcomed the move up in interest rates, with UK gilts posting positive returns.
This week
- Events over the weekend in Russia will be closely watched this week. However, in terms of scheduled data, the focus will remain on inflation.
- In the US, PCE inflation data is released on Friday, with expectations that the headline number falls from 4.4% to below 4%.
- The Eurozone also has inflation data out this week, with individual countries releasing their numbers across the week and then the Eurozone number as a whole being released on Friday.
Equity returns are in GBP, Oil is in USD. Gold is shown in GBP. Bond returns are all shown in GBP. Source Bloomberg.
Last week in more detail
- Last week saw a raft of interest rate rises and this weighed heavy on stock markets. The Central Banks of Norway, Switzerland and the UK all raised interest rates and the US Federal Reserve Chairman (Jay Powell) made a statement saying that “it will be appropriate to raise interest rates somewhat further by the end of the year”. This drove a negative return for stock markets on the week, with the global index of shares falling by 1.1%.
- The UK stock market (FTSE All Share) fell by 2.7% on the week and within that, domestic shares (FTSE 250) fell by 5%, whilst the larger companies in the FTSE 100 fell by 2.3%. Within the FTSE 100, it was the economically sensitive sectors such as housebuilders and mining companies which fared worst. The worst 3 shares on the week in the FTSE 100 were DS Smith (-12.9%), Anglo American (-11.7%) and Persimmon (-10.7%). At the other end of the scale, Ocado rose by 16.4% (on speculation of a bid by Amazon), GlaxoSmithKlein rose by 4.4% and B&M Value Retail rose by 3%.
- Having been on a tear recently, Japanese shares fell back by 3.1% on the week. This was probably driven by profit taking more than anything else, with the Japanese stock market (Nikkei 225) enjoying a barnstorming year and recently having clocked 33-year highs. However, there was also a slightly higher than expected core inflation reading last week from Japan, with core inflation coming in at 3.2% vs expectations for a reading of 3.1%.
- UK inflation and UK interest rates were by far the biggest news of the week. Inflation (CPI) came in at 8.7% which was the same level as the prior month and significantly more than the 8.4% that was expected. “Core” CPI (which excludes food and energy) rose to 7.1% (from 6.8%), which was the highest level since February 1992 (when interest rates were 10%). The higher-than-expected inflation led to the Bank of England increasing interest rates by 0.5% to 5%.
- 5% interest rates in the UK make for the highest reading since 2008 and the Monetary Policy Committee (MPC) voted 7-2 in favour of this hike. Governor Andrew Bailley was amongst the 7 members who voted in favour of the hike, whilst the 2 dissenters voted for no change in interest rates. Bond futures markets are now pricing in 4 more hikes from the BoE by the end of the year, which would take interest rates to 6%.
- Bond markets welcomed the interest rate hike. UK bond yields fell as increasing chances of a recession were priced in. Whilst this isn’t good news for the economy, it does reflect the fact that financial markets view it as the right course of action. The UK government bond market rose by 0.6% on the week, whilst the UK corporate bond market rose by 0.2% on the week. UK 10-year bond yields closed out the week with a yield of 4.3%.
UK inflation came in at 8.7% last week. This was more than expected and prompted the Bank of England to hike interest rates to 5%: the highest level of interest rates since October 2008.
Source: Bloomberg
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