US INFLATION DATA PRESENTS A MIXED PICTURE BUT MARKETS STILL EXPECT RATE HIKES TO END SOON

US INFLATION DATA PRESENTS A MIXED PICTURE BUT MARKETS STILL EXPECT RATE HIKES TO END SOON

This week has seen inflation take centre stage once more. US headline inflation fell as expected, but core inflation ticked up slightly. This means rate hikes remain a live issue for the US Fed as other data shows the US economy remains robust. The minutes from the last interest rate meeting show Fed officials expect a mild US recession but the relatively calm market reaction shows that investors’ views have not significantly changed.

Meanwhile the chancellor has given an indication that the UK could be voting in a general election this time next year. In an interview at the International Monetary Fund conference in Washington, Jeremy Hunt said the government would call an election when the economy was starting to improve. While he said the IMF’s forecast for a 0.3% contraction this year is too gloomy, he agreed the UK will return to growth next year and expects inflation to be under 3% by the end of 2023. A lot has to go right for the government between now and then, but it appears the chancellor is keen to get to the polls as soon as possible to make the most of any positive sentiment.

INFLATION:MIXED US DATA GIVES NO CLEAR SIGNAL TO MARKETS

Inflation data from the US presented a muddled picture. Headline CPI declined once more and is now around half the peak achieved last summer. However, core inflation (excluding more volatile food and fuel costs) defied expectations to increase slightly. The lack of a clear signal means the US Federal Reserve continues to face a conundrum and the bank appears split on the subject. Some decision makers recommended the bank pause its rate hikes at the last meeting, while others have advocated for the Fed to maintain its aggressive approach to ensure inflation is brought under control.

Data from Europe shows inflation falling, but the ECB is still keen to restate its commitment to higher rates. Bank of England governor Andrew Bailey said concerns about financial stability would not divert the bank from tackling inflation. Market reaction was relatively calm. The prospect of one more US rate hike meant government bonds fell slightly, driving up yields, and the euro and the pound continued their recent rise against the dollar.

UK: IMF PREDICTS RECESSION AND MEAGRE GROWTH IN 2024

The International Monetary Fund expects the UK to fall into recession and lag other developed markets next year. The IMF forecasts UK GDP to decline by 0.3% this year, with Germany the only other G7 economy expected to contract. It also predicts growth of just 1% for 2024, compared with average growth for developed economies of 2.2%. The IMF’s new forecast is an improvement from January when it predicted a fall of 0.6% for the UK and it now expects the global economy to achieve a soft landing.

The UK’s economy continues to face a number of headwinds. There was no GDP growth in February as a rise in construction activity offset a decline in services. However, GDP for January has been revised up and the economy has finally returned to its pre-pandemic size. The UK’s trade deficit continues to grow and when adjusted for inflation exports and imports both declined in February. Consumer spending is also slowing. After adjusting for inflation credit card spending in March was 6% below the level of 12 months ago.

EQUITIES: CHINESE DEMAND PROVIDES A BOOST FOR LUXURY BRANDS

Makers of luxury goods have received a significant bump from the return of Chinese consumers. Since the Chinese government lifted its anti-Covid restrictions in December economic growth has picked up. The latest data show a big increase in Chinese imports as they return to pre-pandemic levels – although imports have been slower to recover than exports. Chinese consumer spending and consumer sentiment have also improved significantly in the last three months.

Luxury retailers are reporting a big increase in Chinese demand. Sales at French fashion group LVMH increased 17% in the first quarter of the year, which it said was due to a return of Chinese shoppers. Other luxury brands are expected to benefit. Burberry said sales in 2022 were flat as the lack of activity in China offset strong sales in all territories. Luxury brands have generated strong returns in recent months and the biggest names have comfortably outperformed the wider index over the last six months.