With inflation beginning to fall more rapidly in some regions than others, major central banks around the world are taking different approaches to monetary policy.
Market moves that mattered
Rate cuts, hikes and pauses
Central banks moved to a ‘stop-start’ mode regarding rate rises. The Federal Reserve (Fed) opted to pause and maintain rates interest rates, leaving them at 5% to 5.25%. Nonetheless, the Fed’s forecasts indicate a shift upwards, suggesting the likelihood of another 50 basis points of interest rate increases in 2023.
The Bank of England responded to stubborn inflation by raising rates by 0.5 percentage points to 5%, which aligned with the upper end of expectations. Australia resumed rate hikes and Canada also raised rates. Faced with a slowing economy, China cut loan rates by 10 basis points.
US reaches debt ceiling deal
After months of negotiations, a deal on the US debt ceiling was reached, suspending the debt limit until 2025 – after the next presidential election. The US job market continued to thrive, surpassing expectations with robust payroll data for May. Inflationary pressures showed some signs of easing as the US CPI for May dropped to 4.0%. However, the Core CPI only experienced a slight decline to 5.3%. Addressing Congress, Jerome Powell reiterated that inflation remains persistently high and that two additional rate hikes are likely.
UK house prices fall
The impact of higher mortgage rates is beginning to affect the housing market. British house prices fell by 3.4% in the 12 months to June – the biggest fall since June 2009*. Meanwhile, net mortgage lending turned negative in April. UK inflation remained unchanged from the previous month at 8.7%, while core inflation – which strips out volatile items like energy and food – rose by 30 basis points to 7.1%. Shop prices remain elevated, and there were indications that food inflation may have reached its peak at 15%.
Growth was weak in the first quarter with GDP at 0.1%, suggesting the country was teetering on the edge of a potential recession. However, there was a slight rebound in April with GDP growth of 0.2%, primarily driven by the continued strength of the service sector. Despite these challenges, the UK job market remained tight, with unemployment below 4% in April, squeezing regular wage growth above 7%. UK job vacancies in the UK remained above one million at the end of May, marking 12 consecutive months of falls since reaching a peak of 1.3 million in May 2022.
Euro area slips into recession
GDP figures for the first quarter of 2023 were revised downwards to -0.1%. With inflation still high, the European Central Bank (ECB) decided to raise interest rates by an additional 0.25% in June. The region’s annual rate of inflation fell to 5.5% in June, but core inflation ticked up higher to 5.4%.
UK bonds recover
Longer-dated UK government bonds recovered, after falling heavily in May, but UK corporate bonds suffered in June from wider credit spreads, reflecting a tougher outlook for companies. Shorter-dated bonds were hurt most by UK interest rate expectations jumping higher after a stronger CPI inflation reading of 8.7% and the 0.5% interest rate increase from the Bank of England.
Global markets rise
World stock markets had a better month in June, rising around 3%. Outside of the US returns were much lower – notably for markets like Asia and the UK. The pound also strengthened against the dollar, helped by a temporary pause in rate hikes by the US Federal Reserve. A voluntary 1 million daily barrels cut to oil production by Saudi Arabia briefly pushed up oil prices, but recession fears counteracted this.
Opportunities in fixed income
Higher short-term interest rates are not a good environment for global stock markets (where we remain temporarily cautious). However, they now present us with attractive opportunities to lock in to the better returns available from government bonds, corporate bonds and commercial property. For the time being, these areas of the markets remain our focus as we continue to look for early signs that inflation is cooling in key areas such a food prices and parts of the service sector.
Please remember the value of investments and any income can go down as well as up and you may get back less than you invest.