Bank of England’s fight against inflation made harder

This week we saw the Bank of England make a big effort to try and get on top of inflation. The bank has been repeatedly caught out by inflation that has risen far higher and lasted far longer than predicted. It appears that the bank has finally realised that the UK’s inflation problem is much more severe than in other advanced economies. This week’s 0.5% hike was larger than expected but the market reaction was fairly calm.

The UK’s problems are illustrated by this morning’s news as consumer confidence is improving and activity in the services sector continues to grow (it was services spending that largely accounted for the higher inflation reading this week). Retail spending is also on the rise. Governor Andrew Bailey made it clear that rising rates will hit household finances, particularly through rising mortgage costs. However, the number of people on fixed-term mortgages means the impact of higher borrowing costs will be staggered and it will take time for rate hikes to take full effect. In the meantime, the risk has increased that the Bank will go too far in its efforts to regain the initiative and try and restore its credibility.

For the following stories, please click on this link*

• UK: Bank opts for bigger hike as inflation remains unchanged
• China: Central bank cuts rates to revive consumer demand
• Equities: Retailers experience mixed fortunes from inflation

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

 

Markets on notice of more interest rate hikes to come

This week’s central bank interest rate decisions came in as expected. The Federal Reserve left rates unchanged – the first time it has opted not to hike since March 2022 – while the European Central Bank increased rates by 0.25%. The ECB maintained its aggressive attitude to tackling inflation, effectively promising another hike next month, but the Fed was a bit more aggressive than expected. US inflation is heading in the right direction but progress is slow and the jobs market remains robust. Fed members indicated that two more hikes are likely this year and Fed chair Jerome Powell signalled that rates will need to remain elevated to avoid a stop/start approach to tackling inflation.

Next week brings UK inflation data and the Bank of England’s interest rate decision. Strong employment and GDP data have convinced investors that the UK will also be more aggressive and UK gilts were dragged down again. As ever, the higher rates go, the greater the chances that something in the economy breaks. Rising mortgage costs and soaring insolvencies offer a reminder that we may not be too far from that point.

For the following stories, please click on this link*

• US: Federal reserve hits the brakes as inflation eases.
• UK: Strong jobs and GDP mean investors expect further hikes.
• Equities: UK listings have fallen dramatically since the [andemic.

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

 

UK: House prices in first annual decline in over 10 years

Rising mortgage costs and squeezed affordability have been blamed for the first annual decline in house prices since 2012. The Halifax house price index is 1% below the level this time last year as average prices have fallen steeply since their peak last summer. Mortgage rates have doubled in the last 12 months while high inflation has hit affordability as borrowing rates are rising as lenders expect the Bank of England to hike rates again. The Royal Institution of Chartered Surveyors says the outlook has improved but sentiment remains very low compared to the long-term average.

Construction output in the UK remains positive. However, an increase in commercial and industrial construction is offset by a significant decline in housing. House builder Crest Nicholson reported that profits fell by 60% and completion of new projects fell by 20% in the six months to April, as it warned that rising interest rates will continue to undermine buyers’ confidence and depress demand. 

For the following stories, please click on this link*

• Global: Developed economies have all struggled with inflation, but the outcome may not be the same.
• Europe: Eurozone slips into recession as German output declines
• China: Falling international trade further clouds the outlook

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)

Falling energy costs in Europe help drive inflation down

European headline inflation has fallen faster than expected due to lower energy costs. EU headline CPI inflation fell from 7% to 6.1% in May as food inflation also slowed. Core inflation (excluding volatile energy and food costs) fell more than expected as it dropped from 5.6% in April to 5.3%. The EU data was not a particular surprise as several of the continent’s biggest economies including Germany, France and Spain had already reported a slowdown in their inflation rates.

Although consumer confidence remains depressed, European consumer expectations for inflation are now starting to fall as well. This is in contrast to the UK where rising food costs are only just beginning to slow. European Central Bank president Christine Lagarde was quick to say further rate hikes are still necessary. However, the better inflation data caused speculation that the ECB will hike by 0.25% at this month’s meeting before pausing. German, French and Spanish government bonds have all risen slightly this week.

For the following stories, please click on this link*

• US: Positivity in the US following debt ceiling deal can’t hide the generally gloomy outlook
• UK: Retail inflation remains high and clouds outlook for UK
• Commodities: Weaker demand from China weighs on raw materials

(*Please note, The contents of this e-shot been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics, and Bloomberg Finance LP.)