Weekly podcast: US inflation falls back, but not as much as expected
This week’s host, Investment Manager, Andrew Cartwright discusses the ups and downs of the past week with Head of Fixed Interest Research, Richard Carter , and Chris Beckett, Head of Equity Research. Among the topics discussed – inflation, interest rates, the Bank of England, the cost of living and what markets will focus on next.
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Market overview - Alan McIntosh, Chief Investment Strategist
Inflation remains at the forefront of investors’ minds and although the latest US data showed a drop, the pullback was smaller than expected. Bond markets arrested their recent declines last week, but it was another negative week for stocks with the MSCI World Index losing over 2% for its sixth consecutive week of declines – though there was a decent bounce off the lows with a sizable rally on Friday.
Headline US inflation rose 8.3% year-on-year to April, down from 8.5% in March but, perhaps more importantly, above the 8.1% consensus forecast. It was a similar story for the core reading (excluding food and energy) which also pulled back less than expected, coming in at 6.2% versus a forecast of 6.0%. While a near term peak may be in place, the data suggests that prices could well prove sticky, remaining well above central bank targets for longer than hoped for. This added to growing scepticism the Fed can achieve a “soft landing” by managing to curb inflation without causing a recession. The volatility following the release served as a further reminder as to how highly attuned markets are to inflation at present, but once the dust settled stocks were lower and bonds higher – both indicative of slowing growth going forward.
Although the macroeconomic environment in the US has deteriorated substantially in recent months, it is faring far better than the UK where growth has ground to a halt and inflation is expected to continue rising. Last week’s release showed gross domestic product (GDP) declined 0.1% between February and March, following on from zero growth in the previous month. The latest growth figures come at a time when inflation is running at its highest level since 1992, at 7%. The Bank of England forecast inflation could hit double digits in the second half of the year and, with further policy tightening in the pipeline, the outlook is far from sanguine, with the spectre of a prolonged period of stagflation looming large.
The GDP release did little to help sterling, with the pound extending its decline against the US dollar to four weeks in a row. During this period the currency pair has slid around 9 big figures, falling from above the 1.30 level to the low 1.20s. UK large-cap stocks managed to post a small gain on the week, aided by the currency depreciation, and extend a run of outperformance against the US equivalent. While the UK moved further into positive territory for the year the declines in the US deepened and Thursday’s low was within touching distance of a 20% decline from the peak made on 3rd January, close to satisfying the most common definition of a bear market. European shares enjoyed a good week, snapping a losing streak to finish with solid gains led by German and Italian bourses.