Market snapshot: UK confounds again as rate debate continues in US

Every piece of data currently has the potential to move financial markets as investors try to predict what global central banks might do next. Our head of markets analyses events in the US overnight and how UK stocks are reacting.

Global markets mostly drifted lower as investors reacted to the possibility of a recession in the US and weaker than expected Chinese economic data.

Signs that the aggressive Federal Reserve interest rate hiking policy may be beginning to land were in evidence following a slowing increase in the Producer Price Index. At the same time, there was also further softening in the labour market, where initial jobless claims rose by the highest amount since October 2021. The readings add to the Consumer Price Index release earlier in the week, where inflation rose by a less than expected 4.9%, leading to an increasing majority of investors now expected a pause in rate hikes for the June meeting.

• Learn more: SIPP Portfolio Ideas | How SIPPs Work | Transfer a SIPP

However, there remains scope for disappointment, since investors are also pricing in interest rate cuts before the year is out. This is in direct contrast to the Fed’s current mantra of higher for longer and, indeed, comes at a time when the central bank is leaving the door open to further hikes should inflation require further attention. Based on the latest data, a pause may be the best investors can hope for in the short term, with rate cuts only emerging on the horizon later in the year should the US fall into a deep recession, or if there was to be an escalation of the current banking jitters.

Also keeping a lid on sentiment was the seemingly perennial political standoff around the US debt ceiling. Although the authorities are aware of the catastrophic events which would follow in the almost unthinkable event of a default, there are nonetheless hurdles to be overcome before the next extension can be agreed.

In the meantime, as investors continue to shift uncomfortably in their seats, the main indices remain in positive territory for the year to date. The Nasdaq remains at the vanguard of this progress, having added 17.8%, with the S&P500 ahead by 7.6% and the Dow Jones posting a more pedestrian 0.5% increase.

Asian markets came under some pressure following the release of factory gate data which, alongside some weaker consumer price numbers, suggested that the economic recovery in China not only remains patchy, but could be in need of further stimulus from the authorities to maintain any positive momentum. Alongside the US concerns, the possible weakening of global demand was reflected in a further dip in the oil price, which has now lost some 13% this year.

In contrast, UK markets were something of a beacon of resilience in opening exchanges, posting some defiant gains. Within the premier index, Barclays (LSE:BARC), Taylor Wimpey (LSE:TW.), Berkeley Group Holdings (The) (LSE:BKG) and Pearson (LSE:PSON) found some support after broker upgrades, while more generally buying was in evidence across most sectors. As such, the FTSE100 is ahead by 4.1% in the year to date, despite the travails of both domestic and international hurdles.

• US results season has been a success so why aren’t stock prices higher?
• Three American mega brands to keep buying and one I'd sell
• Stockwatch: bulls, bears and a global banking crisis
• The secrets of investing when inflation is high

At the same time, the latest release of UK GDP data confirmed a marginal gain of 0.1% for the quarter, despite a dip of 0.3% in March. The reading was taken as another sign of some latent strength in the economy, particularly given the negative effects on the reading of continued strike action in February and March.

As something of a domestic barometer, the FTSE250 has also nudged further ahead given the UK’s ability this year to continue to confound the cynics, rising by 2.4% in the year to date.