Market snapshot: fresh jitters on interest rate speculation

As global central banks fight inflation with higher borrowing costs, investors want clarity on policy. Our head of markets discusses reaction to latest comment from rate setters.

Stocks slipped after further Federal Reserve comments which poured more cold water on any immediate hopes of a change of policy direction.

It is a testament to the current levels of uncertainty on the outlook that investors seem continually surprised by the Fed merely repeating its mantra. Rates are likely to continue rising for the moment, and may well stay higher until such time as a sustained slowdown in inflation is evident. Such indicators are few and far between at present, with the latest jobless claims data pointing to a labour market which remains tight.

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The current market view is that a 0.5% interest rate rise next month will be followed by a similar hike in February, at which time there could be a pause for reflection. While that would leave rates in a range of 4.75% to 5%, the latest Fed comments edged up the projected range to 5% to 5.25%, although this expectation will remain data dependent.

In the meantime, it is difficult to argue that the Fed’s actions to date have had a material impact on slowing down the economy, even if the worst-case scenario remains that over-tightening could lead to recession. It seems equally possible that the assertiveness which the central bank is maintaining on its policy could leave some room for flexibility on easing – but only when the data dictates.

The slight drop in the main indices added to the declines in the year to date, with the Dow Jones now down by 8%, the S&P 500 by 17% and the Nasdaq still deep in bear market territory, having fallen by 29%.

Asian markets also remained on guard given the tepid economic backdrop. In China, reports that banks had been asked to check bond market liquidity following some investor losses soured sentiment, while another rise in Covid-19 cases fuelled concerns that the recent easing of lockdown restrictions could be reversed. In Japan, high energy costs and a weakening yen led to an inflation print which hit a 40-year high, with the performance of the currency resulting in rising import costs.

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In the UK, a slightly better than expected retail sales figure did little to assuage concerns that the economy is facing a gruelling immediate future after the Autumn Statement announcement. The Bank of England also has the unenviable task of attempting to tame inflation with further rate hikes at a time when an ailing economy seems unable to withstand the additional pressure. 

Sterling has had a reasonably positive week, although for the most part driven by US dollar weakness as opposed to improving prospects, while the FTSE 250, a quasi-barometer of the UK economy,  has now fallen by 18% in the year to date.

The FTSE 100 continued to wade through treacle, even though its relative performance in the year to date remains robust in global terms. A fall of just 0.2% has been underpinned by a generous dividend yield, exposure to overseas earnings boosted by sterling weakness, and an idiosyncratic mix of constituents which can benefit from both cyclical and defensive interest. 

Indeed, the index was propped up in early exchanges by a mixture of advancing stocks ranging from oils and miners to utilities.