Market snapshot: consumer confidence strengthening as UK opens up

Inflationary pressures are likely to ease in the second half of 2021, says Richard Hunter.

Investors shrugged off a higher-than-expected inflation print having taken a good look underneath the bonnet.

The 5% figure was higher than the 4.7% which had been widely expected, but major drivers of the increase were airline fares and the sale of used cars, the latter of which was partly prompted by the semiconductor shortage currently affecting the industry. 

With further easing of lockdown restrictions likely to give a fillip to the leisure and hospitality sectors and, to some extent, tourism, there could be more pressure on prices to come. However, the current indications are that inflationary pressures are likely to subside in the second half of the year and, increasingly, investors are beginning to warm to the Federal Reserve’s narrative of the current elevated levels being transitory.

In addition, jobless claims fell to the lowest level for 15 months, although any signs of entrenched wage inflation will be closely monitored by investors in the coming weeks.

The resulting relief from the economic data propelled the S&P 500 to a new record closing high and the index has now added 12.9% in the year to date. Meanwhile, the Dow Jones is ahead by 12.6% and the Nasdaq has continued its more recent recovery, currently up by 8.8% so far this year.

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Economic recovery was also in evidence following the release of the GDP number for April in the UK, which saw growth of 2.3%. While this leaves the UK economy 3.7% shy of its level just prior to the pandemic hitting in 2020, it is nonetheless further proof that the positive direction of travel is becoming established. The further lifting of restrictions were a major contributor to the strength in growth, most notably driving improvements in the likes of hospitality and non-essential retail.

With consumer confidence also having strengthened in recent months ahead of the continuing reopening, the economic clouds appear to be clearing.

This has been beneficial both for sterling and the more domestically focused FTSE 250 index, which is now ahead by 10.5% in the year to date. While the strength of sterling may crimp some of the further gains for the premier FTSE 100 index, currently up by 9.9% this year, the UK is gaining popularity as an investment destination, with its undemanding valuation increasingly enticing overseas institutional buying interest.”