Market snapshot: UK drowns its sorrows as America decides rates

On the day that US policymakers announce their latest interest rate decision, we hear that British pubs and bars have been busy recently. Our head of markets reports.

Investors reacted warmly to the latest US inflation figures, and with the Federal Reserve decision due today there is a feeling of one down and one to go.

The consumer price index increased by 4% year-on-year from a previous level of 4.9% in April, with a general direction of travel becoming firmly established in achieving the Fed’s target of 2%. Energy and services prices led the relative decreases, although there remain areas of concern such as used car and rental costs. As such, underlying pressures remain strong, with core inflation still at 5.3% and which is likely to inform Fed thinking.

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Even so, a rate hike pause later today is all but nailed on in terms of consensus, although given the sticky nature of parts of the inflation release, the door remains ajar to a further rise next month. There are other factors at play which will complete the picture for the Fed, such as the current resilience of the labour market and the potential for GDP growth, which would suggest that the economy remains strong enough to withstand the blows of further hikes.

The trick remains whether the Fed can engineer a soft landing as opposed to a full-blown recession, helped along by tighter credit availability and an apparent evaporation of the pandemic savings of the vital US consumer.

From a market perspective, forecasts for the upcoming second quarter reporting season in July are already showing signs of cooling, while the strength of the technology-exposed indices masks the fact that the rallies have been largely driven by just a handful of stocks as opposed to a broad recovery.

In the meantime, those indices continue to forge ahead, with the S&P500 and Nasdaq up by 14% and 30% respectively in the year to date, and with the more traditional Dow Jones having added 3.2%.

Asian markets were broadly higher, with the more recent star of the show, the Nikkei, hitting new highs as the accommodative central bank policy continued to be welcomed. In addition, and with some irony from a global perspective, the return of some inflation which has hindered growth for may years has also added to a potential step-change both in terms of psychology and profits.

Chinese stocks were also marginally higher on the whole in anticipation of a further rate reduction from the authorities on Thursday. The faltering economic recovery has been a large disappointment to investors, particularly after a strong start to the year, and with the consumer and the property sector still ailing, a helping hand is looking increasingly likely in an effort to revive the country’s fortunes.

Domestic events

In the UK, it appears that consumers are drowning their sorrows, as a poor month for housebuilders was offset by strong trade at bars and pubs. GDP growth of 0.2% in April hardly shot the lights out, but compared to a fall of 0.3% the previous month.

However, on top of figures yesterday which showed strong wage growth and falling unemployment, the Bank of England has its hands tied behind its back, with at least one more rate hike inevitable and with recession never far from the surface given the toxic combination of inflation, rising rates and anaemic growth. Against such a backdrop, the more domestically focused FTSE 250 has shown some resilience and has added 1.9% in the year to date.

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For the premier index, any bets were off the table ahead of the Fed decision, as investors chose a wait and see approach. In a tepid opening, there were few stock specific or sectoral moves of note. With its constituents’ large exposure to overseas earnings and the US in particular, any more meaningful moves may well be driven by further developments from the other side of the pond.

In the meantime, the FTSE100 has added just 1.8% in the year to date, with a combination of global issues erasing most of the gains from earlier in the year.