Once again it was “inflation” that was driving markets and last week the spotlight was on the UK. The 7.9% CPI print was less-than-expected and drove a big rally in both the stock market and the bond market, with interest-rate-sensitive areas of the markets rallying hardest (such as housebuilders and consumer stocks). This week sees the focus back to “interest rates”, with the US Federal Reserve meeting on Wednesday night likely to be the focal point. We expect rates to increase to 5.5% and will be keenly tuned in to Fed Chair Powell’s comments for any indications that this might represent their last hike. On top of that, there’s lots to look out for in terms of company reporting, with 165 of the companies in the US S&P 500 index reporting over the week.
Last week
- UK inflation came in below 8% for the first time since March last year
- The Pound sold off as interest rate expectations were revised downwards
- Stocks rallied, with UK stocks grabbing the yellow jersey
- UK bonds enjoyed a particularly good week: bond yields fell on the back of the lower inflation number.
This week
- The US Federal Reserve meeting (which concludes on Wednesday) will be the key focus: we expect interest rates to be raised to 5.5%
- The European (Thursday) and Japanese (Friday) Central Banks also meet to decide on interest rates
- There is lots to watch on the corporate reporting front, with 165 companies reporting in the S&P 500 and 200 of the Stoxx 600 in Europe. Tuesday sees Microsoft and Alphabet report, whilst Meta reports on Wednesday.
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
- Stock markets posted a really strong week, with the UK stock market leading the charge! UK stocks rallied hard on the back of a lower-than-expected inflation number. This saw the UK FTSE All Share up by 3.1% on the week, with the domestic shares in the FTSE 250 up by 3.4% on the week.
- Within the UK share market, the companies that benefit most from lower interest rates did best: namely housebuilders and consumer stocks. Ocado rose by 15.6% on the week, with Barrat Developments up by 11.4% and Taylor Wimpey up by 11.3%.
- The US and the Global share market also posted good gains (+2.7% and +2.2% respectively), but this was more a function of the Dollar being strong against the Pound. The Pound fell by 1.8% vs the US Dollar last week due to less future interest rate hikes being priced in by the bond markets. The lower-than-expected inflation number led the bond markets to price in a terminal interest rate of 5.85%, whereas the week before the number came out, they were pricing in a terminal interest rate of 6.25%. This made a big difference to both the mortgage markets and the bond markets in the UK: lower inflation means interest rates don’t have to go so high which is good news for the UK consumer.
- UK inflation (CPI) came in last week at 7.9%. This is still a high number, but it is lower than the 8.2% that had been expected (by Bloomberg economists) and lower than its prior level of 8.7% and a lot lower than the October 2022 high of 11.1%. Although it helped UK stocks have their day in the sun last Wednesday when the number was released, it is worth setting it aside other economies such as the US for context. In the US, inflation is running at 3% and was 9.1% last June: it’s great to see the UK heading in the right direction, but we’re still a long way behind, with a long way to go!
- Bond yields in the UK fell last week (lower inflation means less need for higher interest rates) which made for good returns for UK Gilts and UK Investment Grade Corporate debt. UK Government bonds (“Gilts”) rose by 1.4% and UK Investment Grade corporate debt rose by 1.3%. UK 10-year gilt yields closed out the week at 4.28%. The Bank of England meet next on 3rd They are still expected to increase interest rates, but by less than expected given the softer (better) inflation data. We expect them to hike interest rates by 0.25% to 5.25%. Bond markets are now expecting the Bank of England to hike interest rates up to 5.85% by January next year. This is still a high level, but it is less than the 6.5% rate that was being priced in by the bond markets just a few weeks ago.
Last week saw UK inflation come in at 7.9%. Still a high number, but this was less than had been expected and the markets welcomed it!
Source: Bloomberg
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