Market snapshot: mixed messages and mixed reactions to US rate strategy

Inflation and central bank interest rate policy remain the major focus for investors, and the latest decision in the US was keenly watched. Here’s our head of markets’ reaction.

Mixed messages from the Federal Reserve provoked a mixed market reaction, while any thoughts of rate cuts this year finally evaporated.

Although rates were unchanged for the first time in many months, the Fed surprised investors with a suggestion that two further rises could be in the pipeline this year, depending on ongoing economic data. The accompanying comments led investors to dub the decision as a “hawkish hold” as Chair Jerome Powell gave an overview of the latest thinking.

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With US growth and the labour market showing few signs of wilting, the groundwork is laid for an economy which at present can clearly withstand the hiking pressure it has been under. By the same token, the previously announced moderation of consumer prices was followed yesterday by a release which showed producer prices falling more than expected. The news prompted Powell to observe that the conditions for slowing inflation were “coming into place”, but that the process would nonetheless “take some time”.

No decision has yet been made for the July meeting, with the consensus tilting towards a hike of 0.25%. The suggestion of another rise in addition to July took some wind from investors’ sails, where the Dow Jones lost ground as the other main indices marginally held up. The overall conclusion that the fight against inflation remains live will likely rekindle concerns over the possibility of recession should the Fed overtighten, with the central bank very much keeping its options open.

The trading session was volatile both on the breaking news and the subsequent press conference, but the moves did little to move the dial on the performance of the main indices in the year to date, where the Dow Jones has added 2.5%, the S&P500 14% and the Nasdaq 30%.

Asian markets had their own fish to fry, as eyes turned once more towards the disappointing Chinese economic rebound. Youth unemployment hit another record high of 20.8%, while industrial production and retail sales grew at a slower pace than the previous month. Consumers appear to be keeping their powder dry until such time as a full recovery is in plain sight and, with momentum from earlier in the year clearly weakening, markets actually rose on the increasing possibility that stimulus will be forthcoming in an effort to reignite economic fortunes in the region. 

UK markets erred on the side of caution at the open, choosing to take Wall Street’s more circumspect lead. The uncertain US outlook and a recent rally in Sterling have both worked against the main constituents of the FTSE100 given its bent towards overseas earnings, while the domestic economy remains braced for more economic pressure in the form of further interest rate hikes.

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The dip in early exchanges was exemplified by further weakness in the mining and housebuilding sectors, while Diageo (LSE:DGE) fell foul of a broker downgrade.

Informa (LSE:INF) was a rare highlight after raising its full-year guidance following accelerating growth, but the generally dour mood further eroded what had previously been strong gains for the premier index, leaving the FTSE100 ahead by just 1.8% in the year to date.