With the rate of consumer price rises easing, there are hopes that central banks could stop increasing interest rates soon, which would be welcome news for the economy and markets.
Market moves that mattered
US inflation cooled from 6% in February to 5% in March, which is the slowest rate of price increases since they began to climb in 2021. Core inflation, which strips out volatile energy and food prices, remained high at 5.6%, compared with February’s 5.5%. UK inflation remains in double digits, after falling from 10.4% in February to 10.1% in March.
Producer price inflation has been weakening in the background and that may help to quash future headline inflation. Meanwhile, food price inflation and high service sector prices are now offsetting the fading impact of last year’s energy prices hikes, keeping inflation bubbling along.
Hopes of interest rate pause
Cooling inflation on both sides of the Atlantic has raised hopes that central banks could pause their interest rates hikes. Adjusting to higher interest rates, after many years of ultra-cheap borrowing, will undoubtedly have implications for companies as well as banks.
Martin Lawrence, Director of Investments at Wesleyan, said: "Markets will be analysing the upcoming corporate results season for any clues about the delayed effect of higher interest rates, with fears that recessions have merely been delayed rather than derailed. This raises the risk of a ’policy mistake’ by central banks if they continue raising interest rates aggressively."
UK economy flatlines
The UK economy flatlined in February with no growth in GDP as strikes weighed on output. Britain’s unemployment rate rose in March, while the number of job vacancies drifted down for the ninth month in a row*. UK wage growth excluding bonuses remained at 6.6% in the three months to February, adding to inflationary pressures that are concerning the Bank of England.
In the US, banks continued to see deposit outflows to money market funds. US wage growth softened by more than expected to 4.2% in March. However, US GDP in the first quarter was weaker than expected with growth slowing to 1.1%. In contrast, China’s economy rebounded after pandemic restrictions were lifted, with GDP rising by 4.5% in the first quarter.
Global stock markets rise
Share prices around the world rallied after cooler than expected US inflation figures raised hopes that the Federal Reserve could pause its monetary tightening after one more rate hike in May. The value of UK financial assets were boosted in April by a stronger pound, and UK and European equities topped the performance tables for the month.
In stock markets we continue to sell UK equities after periods of strong performance, and we are diversifying into overseas assets. Early quarterly results from the US technology sector were good enough to prevent stock markets from slipping back at the end of April. Any weakness through the upcoming company reporting season could give us scope to push overseas at a faster pace.
Bonds yields rise
Contagion fears following the recent US bank failures (including Silicon Valley Bank, Silvergate Bank and Signature Bank) faded in April. However, UK government bonds fell, keeping corporate bonds on the backfoot too, as core inflation proved stickier than hoped. Meanwhile, concerns that inflation in the US, Europe and UK is not falling as rapidly as hoped kept bond markets on the back foot.
As we approach the peak for global interest rates, we again have an opportunity to buy higher-quality corporate bonds. We are now looking to lock in these better potential returns (yields) for slightly longer periods (by increasing duration gently). UK long duration bonds fell heavily in March, retracing a large proportion of the big gains witnessed during the month as systemic fears eased. However, individual banks, such as First Republic, still faced challenges from large deposit outflows.
Oil prices surge
The Organisation of the Petroleum Exporting Countries (OPEC) unexpectedly cut output at the start of April by over one million barrels a day, which sent the oil price sharply higher. However, by the end of the month the price had reversed all the gains it had initially made owing to a weakening outlook for the global economy.
UK commercial property still looks attractive as a long-term asset with strong growth potential. However, gaining exposure to these investments can take time to complete and a more resilient economy has prevented real estate values from falling further, for now at least.
* Office for National Statistics