There's still lots for investors to consider, and an interest rate decision plus further economic data will keep traders glued to their screens. Our head of markets explains current thinking.
Markets were generally flat on Wall Street overnight as investors continued to consider the implications of recent banking stress as well as looking ahead to the latest US inflation print.
Some of the wind was taken out of the sails following the release of a loan officer opinion survey which, perhaps unsurprisingly, showed a slight tightening in credit conditions over the last couple of months. Small and mid-size banks, keen to protect their balance sheets amid some customer deposit outflows, have seemingly reduced risk tolerance, while reduced demand from the consumer in the likes of car loans added to the mix.
However, credit card spending remained largely unchanged, suggesting that the consumer is turning to credit having exhausted the balances built up during the pandemic. The broader picture of banking stress remains a concern, although the fact that it has so far largely been limited to smaller banks and that there was some swift remedial action from the authorities has served to contain wider turmoil for the moment.
The next test of investors’ mettle is never far away, and tomorrow’s Consumer Price Index will provide the latest signal for likely Federal Reserve policy in the months ahead. The robust non-farm payrolls report at the end of last week pointed to a resilient jobs market, which lessens the probability of an imminent interest rate cut, which some investors are pricing in despite the Fed’s protestations that rates are likely to remain higher for longer.
For the inflation release, a headline number of around 5.5% is expected, which would be in line with a more recent trend of deteriorating inflation prints, although improvements in the housing market and wage inflation are both making the task of reducing somewhat sticky inflation less straightforward.
In the meantime, the resilience of the US economy in the face of aggressive Fed tightening has also elevated hopes for a soft landing should the economy near a recession in the coming months. Markets have also maintained optimism on the immediate outlook despite the contrasting data but boosted by a recent quarterly reporting season which showed few signs of stress so far. In the year to date, the Dow Jones has added 1.4% and the S&P500 7.8%, while the Nasdaq remains the star performer after a woeful 2022, ahead by 17.1% so far this year.
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Asian markets were mixed to lower overnight, stymied by the uncertain inflationary outlook and in the absence of any positive catalysts. The Chinese recovery story also continues to paint a mixed picture, with a surge in exports last month somewhat offset by a slowdown in imports, posing some questions on general industrial demand. While consumers have shown signs of confidence following the reopening of the economy, it is not yet clear how much of the recovery is due to pent-up demand and whether this trend will continue.
UK markets returned after an extended weekend and were largely unmoved by events elsewhere. The FTSE100 traded around flat in early exchanges, with a positive nod to the banks coming ahead of the expected further 0.25% rise in interest rates from the Bank of England announcement on Thursday, but with some weakness in the housebuilders following a sluggish start to the spring buying season. Even so, the premier index has continued to display its defensive resilience and has added 4.3% in the year to date.
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Such an interest rate rise would have been prompted by the need to tame inflation, but comes at a time when stagflation is an inevitable outcome given lower growth. UK retail sales provided something of a bright spot after rising 5.1% year-on-year in April, although consumer behaviour continues to evolve in light of the tightening economy.
However, the domestic barometer which is the FTSE250 has reacted to a generally better performance from the UK than had been feared, and has added 3.1% so far this year.
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