Market snapshot: opinion remains divided on interest rate decisions

Wall Street has traded at prices not seen since last summer, but a number of major issues rumble on. Our head of markets looks at both current thinking on these plus stock movements on Monday.

US markets flagged after an otherwise positive week, as debt ceiling negotiations hit an impasse and were suspended for the weekend.

While the likelihood of what would be a financially catastrophic default is considered low, investors remain on edge and will continue to be so the longer the talks progress. Even so, this current saga is an unwelcome distraction from the current state of the nation in economic terms.

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Opinion is still divided on the Federal Reserve’s next interest rate move at the June meeting, with the current consensus indicating that there will be a pause to the hiking policy. Indeed, comments from Chairman Jerome Powell on Friday recognised that the recent banking turmoil could lead to reduced bank lending, and in turn slowing growth and dampening inflation.

As such, he added that rates may not have to rise as much as had been expected. However, a gulf remains between the current Fed mantra and market expectations of rate cuts before the end of the year.

Elsewhere, a generally better than expected quarterly reporting season continued to wind down, although earnings had been set against extremely low expectations. Outlook comments from corporates were generally cautious, but positive and attention will now turn to the lagging effect of interest rate rises and stubborn inflation on margins and profits. The latest clues will come later in the week with the release of the latest Fed minutes on Wednesday and the Personal Consumption Expenditures inflation number on Friday.

In the meantime, mega tech stocks continue to be the most crowded trade as a haven against possible recessionary times to come, with the likes of Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT) and Meta Platforms Inc Class A (NASDAQ:META) all hitting year highs over recent sessions. The Nasdaq has now added 21% in the year to date after a parlous 2022, with the S&P500 up by 9.2% and the Dow Jones Industrial Average by 0.8%.

The mood in Asia was more upbeat, despite China keeping rates unchanged as expected. While the reasons for the decision are understood to be driven by the fact that its GDP goals are well within reach, there has nonetheless been a raft of recent data suggesting that the economy has lost some momentum after the initial bounce following the reopening.

More positively, remarks from the US President over the weekend suggested an imminent thawing of relations between the US and China, and a suggestion that the Group of Seven was not looking to decouple from China in terms of supply chains, but rather to “de-risk” by providing alternative options. 

In the UK, the first chance to react to a positive Asian session but a weaker US close resulted in something of a stalemate in opening exchanges. Despite broker downgrades to the likes of Kingfisher (LSE:KGF) and Sainsbury (J) (LSE:SBRY) providing a small drag, firms with Chinese exposure such as Standard Chartered (LSE:STAN) and Burberry Group (LSE:BRBY) found some support. A further pleasing update on the airline sector came with the release of full-year numbers from Ryanair, giving a positive read across to International Consolidated Airlines Group SA (LSE:IAG) and Rolls-Royce Holdings (LSE:RR.). The FTSE100 edged higher and is now up by 4.3% in the year to date.

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There will also be updates to the current state of the UK economy in the coming days, with the release of inflation and retail sales data providing further inputs to the Bank of England’s next interest rate decision.

To date, the economy has proved more resilient than expected on many metrics, as reflected by a gain of 2.4% for the FTSE250 so far this year. It also remains to be seen on home soil whether the ongoing rate rises will tip the UK over the edge into recession, which the economy has narrowly avoided over several occasions in recent months.