Market snapshot: inflationary concerns linger

Investors moved on to the back foot with inflation clearly remaining in play, forcing them to consider whether the rate-hiking programme is over after all.

Minutes from the latest Federal Reserve meeting weighed on US markets, with the potential for further rate hikes still on the table. The Fed noted that inflation was still well above target and the labour market still tight, with most members seeing significant upside risks to inflation. In addition, with growth risks to the downside and inflation risks to the upside, the delicate balance between taming inflation and avoiding recession remains a live issue.

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Other economic data has supported the resilience of the US economy, with strong hiring and retail sales numbers showing that the consumer is still alive and well, while the recent GDP number also pointed to a robust foundation. While the consensus continues to point to no change at the September meeting, the odds are rising for a further hike in November. Such uncertainty has led some investors to reconsider whether the fact that markets had been pricing in victory against inflation came too early, and in any event whether higher rates could remain in place for longer than had been anticipated.

Technology stocks are seen as being especially vulnerable to higher interest rates, such that the Nasdaq and to some extent the S&P 500 bore the brunt of a wave of selling. Even so, the overall picture for the year remains strongly positive, with the Nasdaq having added 29%, the S&P 500 15% and the Dow Jones 5%.

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Asian markets were weighed down once more, with China at the eye of the storm. Despite some efforts by the central bank to boost the economy such as Tuesday’s move to cut key policy rates, investors have turned their back until further measures are announced. The high rate of youth unemployment, tepid consumer spending, deflation and weakening trade numbers are all playing their part in keeping the lid on any signs of optimism.

In particular, the beleaguered property sector remains under the spotlight, with the latest show of strain coming from Zhongzhi Enterprise Group, which announced that it was facing a liquidity crisis which would lead to a debt restructuring. The news followed hot on the heels of Zhongrong International Trust having revealed that it had missed several repayments since the end of July.

Meanwhile, the February record highs for the FTSE 100 are now a distant memory, with the weight of money seeming to have moved on to pastures new. Indeed, after another weak opening taken from global cues elsewhere, the index is now in negative territory for the year to date, having fallen 1.6%. Further pressure came from the technical outcome of a number of heavyweight stocks being marked ex-dividend, such as GSK (LSE:GSK), Imperial Brands (LSE:IMB) and the London Stock Exchange Group (LSE:LSEG).

Nor are the darkening clouds restricted to the premier index, which has a largely international bias. The more domestically focused FTSE 250 has also slid into the red and now stands down by 1.8% so far this year. The initially positive reaction to the UK headline inflation number soon evaporated on closer inspection, as the core rate of inflation growth remained unchanged. Not only does this show that these measures of inflation will be harder to shift, it also all but confirms more interest rate rises to come, thus heightening the possibility of a recession following behind.