Market snapshot: interest rate intrigue rumbles on

Interest rate intrigue continues to hover, with the many variables leading investor sentiment in different directions.

The main US indices were mixed to positive in choppy trading, in contrast to recent days where interest rate cut projections have weighed on market performance.

The latest developments were far from conclusive, with a weaker than expected manufacturing PMI reading offsetting some of the turmoil caused earlier in the week by a manufacturing index release which showed the sector in its strongest position since September 2022.

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Further price data offered hope of an encouraging downward trend for inflation, although a separate report from ADP saw wage growth of 10% for individuals moving jobs year-over-year, thus keeping the debate alive. Higher wage growth can be inflationary of itself since it could propel consumer demand for services and goods and therefore send prices higher.

Amid the noise, comments from Federal Reserve Chair Jerome Powell were typically balanced. The mantra remains that the Fed is unwilling to act too soon in cutting rates, which would be “disruptive” in the inflation fight, while also reiterating that there is limited pressure to act at all for the time being if the economic data continues to show growth under its own steam despite the restrictions of higher rates which are currently in place. By the same token, and assuming that the Fed’s projection for the economy plays out over the coming months, it still expects that cuts will be appropriate “at some time this year.”

The net result was a marginal gain for the S&P500 and Nasdaq indices, which now stand ahead by 9.2% and 8.4% respectively so far this year. The Dow Jones index was hampered by a poor operating performance from Intel Corp (NASDAQ:INTC) and some disappointment surrounding investor activist moves at The Walt Disney Co (NYSE:DIS), although the index remains up by 3.8% in the year to date. 

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Asian markets were also mixed overnight, with a stronger performance coming from Japan’s Nikkei index given ongoing weakness in the yen, which has boosted the outlook for the country’s many exporting companies.

At the same time, commodities continued their strong run based on a number of factors, such as a possible recovery of demand from China which has boosted the likes of copper and followed through to the mining sector. Meanwhile, the oil price is now up by 16% this year with the latest potential for further geopolitical tensions and supply disruptions giving firm support for the price.

Having briefly flirted around record levels earlier in the week, the FTSE100 has subsequently given up some of those gains, although the index remains up by 2.8% so far this year. The strength of commodity stocks has had a positive impact over recent days, although on an overall valuation basis the UK as a whole continues to significantly trail many of its global peers.

Early trade activity was muted, with a number of stocks such as IMI (LSE:IMI), Rentokil Initial (LSE:RTO) and Smiths Group (LSE:SMIN) going ex-dividend and therefore providing a small drag, while the FTSE250 also posted tentative gains to leave the index marginally ahead by 0.4% in the year to date.

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However, the imminent path of interest rates remains core to investor sentiment globally, both in terms of the number and the timing of any such easing. Only last week there was an increasing conviction that rate cuts from the Fed, European Central Bank (ECB) and Bank of England would converge and all take place in June. Since then, the possibility of the ECB moving first has been accompanied by increasing debate over whether the other two central banks may delay their first move.