Weekly Market Update- Week Ending 12/05/2023
On Wednesday, we saw the latest inflation data released in the United States. With expectations that there would be no change from the March figure of 5%, the market was pleased to see a slight fall in April to 4.9%. The fall marked the 10th monthly decline since peaking in June last year at 9.1% and will perhaps give the Federal Reserve (Fed) confidence to pause their interest rate hiking cycle when they next meet in June.
Growth stocks responded positively to the news. Following a strong start to the year on resilient earnings data, large-cap tech continues to be in favour. Microsoft for example, having bottomed last November at $214 a share, now trades roughly 45% higher and back within sight of its all-time high of $343.
It is important to note that this reduction in inflation, whilst welcomed, means that the pace of price rises are still increasing at over twice the targeted level. Core inflation, which strips out some of the more volatile components like energy still remains stubbornly high. Many market commentators believe a recession, albeit hopefully a mild one, will be required to bring it back towards the targeted 2%.
Following the Fed’s meeting last week, it was the turn of the Bank of England (BoE) to set interest rates on Thursday. In line with expectations, the Monetary Policy Committee increased interest rates for the 12th consecutive time by a further 0.25% to 4.5%. This now brings interest rates to their highest level for almost 15 years. The Governor of the BoE, Andrew Bailey, acknowledged that inflation is proving stickier than they previously forecasted and vowed to “stay the course to ensure inflation falls all the way back to our target.” The bank now expects inflation to reach the 2% target in 2025, having previously thought this could happen in 2024.
This is unwelcome news for anyone on a tracker mortgage who faces an immediate increase in their interest payments. The majority of mortgage holders, who hold fixed rate deals, face a shock to the household budgets in the coming period as these expire and new deals are likely secured with between 2 and 3 times higher interest costs.
With interest rates expected to fall in the medium term, the curve is inverted, meaning that longer fixes are at lower rates than short-dated ones. Mortgage payers now face a dilemma; do they take a higher rate in the short term (maybe 2 years), in the hope that when the fix expires interest rates will be markedly lower? Or get the peace of mind that a longer deal (say five years) would bring but perhaps feel frustrated that you could end up paying a higher rate, relative to the base rate, if interest rates fall back in the period ahead.
John Naylor, Chartered FCSI – Head of Investment Committee
