Weekly Market Update – 03/05/24

The UK headed to the polls this week for a variety of local elections, where the Conservatives have suffered, losing councillors at a much higher rate than their worst predictions. Although Labour has gained by winning a number of marginal areas such as Hartlepool and Redditch, they have lost out on some votes to the Green party. Results will continue to trickle in throughout the day and into the weekend.

In the US, Federal Reserve (Fed) Chair, Jay Powell, has signalled interest rates may need to remain higher for longer, as inflation persists across the world’s largest economy. The central bank decided to keep rates on hold at this week’s meeting. It has been implied any rate cuts will now be delayed into the second half of the year, although no rate rises are being considered to combat the recent increase in inflation.

Historically, interest rates in the US have been a useful tool in keeping inflation under control. However, this impact does not seem to be having quite the same effect in recent years. Data from the Federal Housing Finance Agency shows that between 1998 and 2020, up to 40% of mortgage loans were 1% below the prevailing market interest rate. However, at the end of 2023, around 70% of mortgage holders had rates locked in at more than 3% below what they would be offered in the current market. This therefore shows that higher for longer rates may not necessarily offer the immediate disinflationary impact the central bank seeks.

Andrea Wood, Chartered MCSI
Investment Manager