Market snapshot: stocks struggle for direction as investors mull rate and inflation debate

Our head of markets Richard Hunter analyses the performance of global markets as the increasingly possible recession outcome in the UK weighs on prospects.

Markets struggled for direction as investors continue to mull over the interest rate and inflation debate.

Despite a reading last week which alerted the bulls that inflation may have peaked, as yet the labour market has yet to get the memo. Other economic releases are painting a slightly weaker picture, although the trends are insufficient to confirm that the Federal Reserve’s monetary tightening has slammed the brakes on growth.

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It is patently clear that the Fed has inflation reduction as its main aim, even though it acknowledges the knock-on risk of derailing the economy. The market is still pricing in a 0.5% interest rate rise in September, although there are increasing concerns that another 0.75% hike could be on the cards, with rates currently projected to peak at 3.5%. Separate comments from several Fed officials suggested that there remains some way to go before victory can be declared on taming inflation.

Meanwhile, the bond market – traditionally a more bearish arena – is standing firm on its recessionary prediction. Seen as a precursor for impending recessions, the Treasury yield curve remains inverted suggesting that interest rate rises may be continuing for rather longer than the equity market is expecting and may even stay there until such time as inflation begins a measurable and sustained fall.

The net effect of the current debate left markets flat, with the year-to-date numbers signalling that recovery is some way away – the Dow Jones remains down by 6%, the S&P 500 by 10% and the Nasdaq by 17%.

Asian markets were also unable to break the stalemate, as weak Chinese data continues to weigh on sentiment. With the country having issued a drought alert today, the pressure will remain although the authorities stand poised to assist as evidenced by an interest rate reduction earlier in the week.

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Perhaps unsurprisingly the muted performance of other global markets left the UK with nowhere to go, with the FTSE 100 opening in uneven fashion. The recent resurgence of the US dollar has dented sterling once more, which has an ironically positive impact on an index where most of the earnings come from overseas, and the US in particular. Coupled with a rising interest rate environment, which has lifted the banks and an oil price that remains up by 23% this year despite the current volatility, the FTSE 100 has managed to keep its head above water and is up by just under 2% in the year to date.

However, the FTSE 250, which is seen as a rather more accurate indicator of UK prospects given its larger proportion of domestic constituents, has fallen by over 14% in the year to date. A raft of uninspiring economic data, such as the tepid retail sales figures and a further slump in consumer confidence released this morning, continue to point to the likelihood of stuttering growth. With the Bank of England set to continue its own bout of interest rate hikes as it combats inflation, the increasingly possible recession outcome has weighed on prospects.