Interest rate debates remain a central plank in investor thinking, with more inflationary data to come this week which could move the needle.
While US markets remain comfortably ahead this year, there has been a slow downward glide path since August, when the relenting resilience of the economy led investors to the conclusion that further interest rate hikes could be on the horizon. At the current time, it is almost universally expected that there will not be a change this month, with the consensus evenly split between a pause and a further hike in November.
In the meantime, a busy economic week will keep traders on their toes. The Federal Reserve’s preferred inflation measure, the Consumer Price Index, will be released on Wednesday and is expected to rise by 0.6% month-on-month, or 3.6% annualised. There is, however, the possibility of an unwelcome shock given the recent strength of an oil price which has risen by 20% since the beginning of July.
Producer price index readings on Thursday could show a similar picture, while the retail sales number and subsequent consumer sentiment survey will also give vital clues as to whether this intrinsic part of US growth remains on track.
With the Fed standing pat on its mantra to remain data dependent on any future decisions, markets remain finely balanced. The ideal outcome of taming inflation while achieving a soft economic landing seems increasingly viable, but there will inevitably be data points along the way to confuse matters. Amid this potential volatility, the main indices have already done some heavy lifting, with the Nasdaq having added 31%, the S&P500 16% and the Dow Jones 4% in the year to date.
After a brief relief rally, the pressure has returned, with investor sentiment towards China waning once more. The property sector remains at the eye of the storm and is currently showing few signs of stabilising. However, there remains some hope that the cumulative effects of some recent easing measures by the authorities could yet have a positive lagged impact.
In addition, inflation data overnight in the region pointed to a more positive outlook than had been the case the previous month, with deflationary pressure easing. In addition, the smallest drop in factory prices for several months added to the narrative, with attention likely now to turn towards whether there are any signs of a revival in consumer demand.
Markets in the UK opened on the front foot with a measured return to a risk-on approach. Mining stocks were the beneficiaries of early buying interest despite the mixed picture of Chinese demand, while the insurers rose on the back of broker upgrades which lifted Prudential (LSE:PRU), Aviva (LSE:AV.) and Legal & General Group (LSE:LGEN). There was also some tentative interest emerging in the beleaguered housebuilding sector. Barratt Developments (LSE:BDEV) and Persimmon (LSE:PSN) are both up over 3%.
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Domestically, there is some important economic data to come this week, with the release of both unemployment and GDP numbers later in the week. The UK economy remains finely balanced, with tepid growth continuing to face the pressure of a higher interest rate environment and weak consumer sentiment.
The FTSE250 has tended to bear the brunt of a guarded outlook and is down by almost 2%, while the FTSE100 is finding lukewarm support which limits its gains to just 1% in the year to date.
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