Market snapshot: ‘too hot to handle’ inflation causes rush for exit

We're all feeling the cost-of-living crisis in some way, and financial markets are as worried as anyone right now. Our head of markets explains why.

The latest inflation print proved too hot to handle, prompting investors to scramble for cover in anticipation of a more aggressive set of central bank moves.

In the US, the inflation reading of 8.6% in May compared to the April number of 8.3%, scuppering hopes that inflation had peaked. As such, the Federal Reserve decision on Wednesday takes on added significance. While investors were relatively comfortable with a likely hike of 0.5%, the fresh inflationary pressure has had some questioning whether a rise of 0.75% could be on the table.

In turn, this would reignite concerns – which had never been far away – that a newly determined round of aggressive monetary tightening could crimp economic growth, to the extent that the spectre of recession emerges.

With risk assets as a whole under pressure, there are few places for investors to hide, with oil and gold also dipping amid the generally dour outlook. The backdrop has left the main indices in the US testing new lows for the year, with the flagship S&P500 now down by 18.1% so far in 2022 and the Dow Jones by 13.6%. Meanwhile, the tech-heavy Nasdaq index, seen as being representative of high growth stocks which are currently deep out of favour, extended its decline for the year to date to stand down by 27.5%.

Asian markets were also under the cosh on renewed growth concerns. The optimism of the previous week all but evaporated as a fresh round of mass testing was announced in Beijing following a “ferocious” outbreak in the heavily populated area of Chaoyang. With easing restrictions only having been announced over the last few days, inevitably the news prompted concerns that demand and indeed consumer confidence would suffer a fresh blow, thus adding to the cocktail of factors which could inhibit global growth.

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Investors hoping for refuge in the UK markets were also disappointed after the wave of deflated sentiment washed through to the main indices. The FTSE100, up until now a beacon of light compared to many of its global peers, is also now in negative territory for the year to date, although a decline of 1.8% is a relatively favourable outcome so far.

In addition, the mood was darkened further as the CBI predicted that inflation would rise to 8.7% in October, leading to a “historic squeeze” which would affect consumer spending. With the Bank of England also due to report its latest interest rate decision on Thursday, another hike of 0.25% to 1.25% remains the likely outcome according to consensus.

Alongside the CBI outlook, the latest figure for economic growth in the UK revealed a contraction of 0.3% for April as compared to a dip of just 0.1% for March. Slower growth and higher interest rates to combat inflation draws an economy closer to stagflation - an emerging picture which seems increasingly possible for most developed economies and markets, leaving investors high and dry for the time being.

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