Market snapshot: oversold sectors, FTSE 100, inflation and interest rates

Clarity around the interest rate outlook is welcome, but inflation is not. Our head of markets covers the impact of both on stocks in his mid-week round-up.

Markets continue on a tentative road to recovery, with investors still buying the dips on what have been considered to be oversold sectors.

At the same time, the gruelling task of balancing interest rate and inflation considerations remains near the top of the investment agenda. The Federal Reserve has now signalled that a more aggressive round of tightening may be on the cards, which has elevated expectations for a 0.5% rise at the next meeting in May.

This in turn has been positive for bank stocks, which are staging something of a recovery and, with the interest rate picture becoming clearer, investors have had time to gauge the effect which the rate rises may have. This includes the fact that the current end game of around 2% would still leave rates low by historical standards, and would not be enough to derail a recovering economy.

Inflationary pressures clearly remain, however, and a first-quarter reporting season which will kick off in the next few weeks has already been marked down in terms of expectations, as the factors of supply chain blockages, rising prices generally and a cautious consumer may have affected revenues and profits. In the meantime, the oil price continues to be strong on concerns around tight global supplies as a result of the Russia-Ukraine conflict and is currently ahead by 49% in the year to date.

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Despite the generally positive moves over the last few trading sessions, the main indices still have some way to go to offset 2022 declines, where the Dow Jones remains down by 4.2%, the S&P500 by 5.3% and the Nasdaq by 9.8%.

Another high inflation print in the UK adds additional spice to the spring spending statement later today. The reading of 6.2% in February was up from 5.5% the previous month, boosted by food, energy and fuel costs and further underlines the disconnect between rises in inflation and wages.

It remains to be seen whether the speculated planks of assistance come to fruition, with the possibility that extra spending to invest in economic growth could be accompanied by nearer term cuts to areas of difficulties for consumers. As such, National Insurance levels, benefits and fuel duty are expected to receive some attention.

The share prices of UK banks have also seen the benefit of rising interest rate expectations, although only Lloyds Banking Group (LSE:LLOY) and HSBC Holdings (LSE:HSBA) have rebounded sufficiently to be in positive territory for the year. More broadly, the UK’s premier index continues to garner investor support given its mix of defensiveness, exposure to energy, inflationary hedges and a generous dividend yield of over 3% on average.

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In early exchanges, the FTSE100 has continued its recent progress in the face of such support, with broad progress across most sectors and a slight tilt towards what have been the more beleaguered stocks of late. As such, the index remains a relative outperformer, now having added 1.5% in the year to date.