Market snapshot: further misery as inflation remains thorn in the side

Central banks are still unsure how hard they'll have to go on interest rates to get inflation under control. That uncertainty continues to be reflected in global stock prices, writes our head of markets. 

Further market weakness capped off a fairly miserable week for investors, with inflationary concerns remaining front and centre.

The US economy is showing little sign of succumbing to Federal Reserve pressure, giving the green light for the current path of interest rate rises to continue. Indeed, such is the backdrop over recent days, including a hotter than expected inflation print, that the scale of the Fed’s action next week is currently under review by the market.

While a hike of 0.75% remains the majority view, there is a growing chorus on the possibility of a 1% rise. The latest economic readings showed an unexpected rebound in August for US retail sales, as consumers chose to spend some of the savings arising from lower gasoline prices on the likes of cars and socialising.

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In addition, the weekly jobless claims number showed a decline to the lowest level since May, underpinning the current resilience of the labour market. A slight dip in manufacturing data was the only print to potentially play into the hands of those seeking to identify a weakening economy.

With inflation remaining the major thorn in the side for central banks globally, the inevitable rate rises to lower the current levels are leading investors to question how high the possibility of recession is now becoming, with any policy errors due to over-tightening likely to be the root cause. Downbeat outlooks from the International Monetary Fund and the World Bank echoed such a possibility.

In the meantime, the bond market is in clear agreement, with yields remaining sharply inverted, often seen as a harbinger of recession. The major indices resumed their decline, with the Dow Jones now down by 15%, the S&P500 by 18% and the Nasdaq by 26% in the year to date.

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In Asian markets, what could have been interpreted as promising news was not sufficient to stem further declines. Retail sales in China increased by 5.4% in August, beating expectations of a 3.5% rise, while industrial output rose by 4.2% against forecasts of 3.8%.

Despite these numbers, the localised issues which the Chinese economy is facing remain intact, while the immediate outlook is being tainted by events elsewhere, most notably from the US, but also in terms of the fresh and negative IMF/World Bank outlooks.

In the UK, retail sales showed no signs of the resilience which the US equivalent had displayed. A decline of 1.6% month-on-month came against forecasts of a 0.5% fall, with the cost of living crisis beginning to take a visible effect on consumer habits. Each of the measured sectors fell in the month, putting further pressure on the economic outlook.

The FTSE250, which has borne the brunt this year of perceived UK weakness given its more domestically-focused nature, has now entered bear market territory once more, having dropped by 20% in the year to date.

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The general gloom also permeated to the FTSE100, which opened unsurprisingly lower. Losses were broad based, but particularly marked in the mining sector on weakening demand, and in the housebuilders amid an increasingly challenging environment.

Marginal rises from four of the five largest constituents of the index – BP (LSE:BP.), Shell (LSE:SHEL), AstraZeneca (LSE:AZN) and HSBC Holdings (LSE:HSBA) – mitigated some of the pressure, but the premier index slipped again to stand down by 1.8% in the year to date.