Week Watch - 22 April 2024

Your 7-minute update on market activity

Stock Take

A survey last year confirmed the chocolate digestive as the UK’s favourite biscuit. So, last week’s news that a fall in the price of chocolate biscuits had contributed to UK inflation hitting its lowest level in two-and-a-half years would have been welcomed by many.

Yet the March fall in inflation to an annual 3.2%, down from 3.4% in February, was less than expected. Core CPI inflation – which excludes food and energy – was also higher than forecast. The figures were a reminder that the fight against inflation was not yet won and added to signs that a first interest rate cut by the Bank of England (BoE) could be further off than markets had expected. Investors trimmed their bets, fully pricing in only one quarter-point cut by the end of this year, possibly as late as November.

Inflation stickiness was also underlined by news that UK wage growth remained high in the three months to February, slowing to 6.0% from 6.1% in the previous quarter. There were signs of easing pressure in the UK jobs market, as new figures showed unemployment has increased to 4.2% between December and February, the highest level for six months.

Although tentative signs of a cooling labour market might embolden the BoE to begin cutting rates, the news on inflation raises the risk that the UK will follow the trend in the US and see inflation stall.

On Tuesday, Federal Reserve Chair Jerome Powell, re-emphasised that US policymakers did not yet have enough confidence in the path of inflation reduction to start cutting rates. That view was supported by US retail sales figures for March that blew past analyst expectations, as online retailers enjoyed a bumper month.

The data followed recent news of robust job gains and a tick-up in consumer inflation; all evidence that the US economy ended the first quarter in good shape and adding to expectations that the Fed could hold off cutting rates until September at the earliest. The odds of a second cut are rapidly dwindling.

George Brown, Senior US economist at Schroders, believes the groundwork for policy easing could be laid by Powell in his keynote speech at the Jackson Hole economic symposium in August, with a rate cut in September, followed by two more in December and March.

But he adds, “There is also a decent likelihood that the Fed does not ease policy at all this year. We now place a 40% probability on such a scenario; a risk that we think is currently being underpriced by the market. And if inflation starts to re-accelerate, the next move from the committee might not be a cut, but instead could be a hike.”

Global markets fell on Tuesday, with European shares registering their worst day for nine months, as concerns about the Middle East conflict were brought back to the boil after Israel vowed to retaliate to Iran’s missile attack at the weekend.

Despite the unexpectedly high US inflation figures, European Central Bank (ECB) officials reaffirmed its plans to cut interest rates in June, “barring major shocks and surprises”. ECB President Christine Lagarde insisted that the disinflationary process was moving in accordance with expectations and that the turbulence in the Middle East had so far, had little impact on commodity prices.

At its spring meetings, the International Monetary Fund set the tone for the global economy narrative, forecasting another year of slow but steady growth, with strength in the US offsetting persisting high inflation, geopolitical tensions, and weak demand in China and Europe.

The sombre market mood saw leading US indices register their steepest five-day losses since March 2023. Yet by the end of the week, markets were hopeful that the Middle East tensions had plateaued after Iran played down Israel’s retaliatory drone strike.

After charging 25% higher over the past six months, the S&P 500 is down around 5.5% from recent highs. It’s important for investors to remember that pull-backs of this scale are typical in any year, as markets consolidate and some investors take profits, particularly after such a rally.

The VIX volatility index, which represents market expectations for upcoming volatility in the S&P 500, has climbed towards its highs of the year, driven by three key factors. These are: markets have repriced the likelihood of rate cuts by the Fed and are adjusting to a ‘higher-for-longer’ outlook; geopolitical tensions have risen, putting upward pressure on oil and commodity prices; and the first-quarter earnings season for S&P 500 companies has seen companies beating forecasts but offering outlooks that are softer than expected.

This week will see the mega-cap technology companies report earnings, including Microsoft, Google and Meta. Expectations are high, but markets will also be hoping they provide solid outlooks to help contain volatility in the technology and growth sectors.

Wealth Check

Interest rates and inflation rates can fluctuate dramatically, as we have seen in recent years. And that can have a very real effect on the spending power of your savings and investments, as well as your day-to-day household expenditure.

Higher inflation means most things cost more. And the knock-on effect of that is that any savings you have won’t buy as much in the future, unless the interest that you are earning on them outstrips the rate of inflation.

When it comes to beating inflation, relying solely on your high street bank savings isn’t always the best strategy.

While banks do pay interest on instant access savings and Cash ISAs, the typical high street rates don’t always outpace, or even keep pace with, inflation. This means that the purchasing power of your savings slowly declines.

If there’s a gap between the Consumer Price Index or inflation rate, and the base interest rate, it’s quite hard to find savings providers that will offer returns above the rate of inflation.

If you’re planning on saving over the long-term , then investing could be a better way to shield your money from inflation.

The key to beating inflation is by investing in assets which produce a higher rate of return than interest rates. Over the long term, that tends to be equities – stocks and shares. They have the ability to outpace inflation, although that doesn’t always guarantee that they will.

You should be aware, however, that investing does come with a certain degree of risk. Spreading your investments across different types of assets – such as equities or bonds – is also a good way to diversify and strengthen your portfolio.

Different assets may not perform the same in changing economic conditions . No single type of asset will be the best performing one forever – so by keeping a diversified portfolio, you can help make your investments more resilient.

Please be aware past performance is not indicative of future performance.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.

Equities do not provide the security of capital which is characteristic of a deposit with a bank or building society.

In The Picture

Over the long-term , different funds can offer a wide variety of performance. However, it’s important to remember each fund will have its own risk profile and objective, which could impact its returns.

Source: Financial Express. Bid to bid basis. Data as of 31 March 2024.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“The vital US aid bill passed today by the House will keep the war from expanding, save thousands and thousands of lives, and help both of our nations to become stronger."

Ukrainian President Volodymyr Zelensky thanks the US for its ongoing support.

Schroders is a fund manager for St. James's Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

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? S&P Dow Jones LLC 2024; all rights reserved

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SJP Approved 22/04/2024