Quilter Cheviot|Weekly Comment

Stocks gain after key central bank decisions

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Last week was a good one for global stock markets with the MSCI All Country World Index rising 2.7%. The gains were all the more pleasing given a backdrop of rising yields following the latest monetary policy decisions from the US and European central banks.

The Federal Reserve (Fed) announced that they would maintain interest rates in the 5.0%-5.25% range, the first time they decided to not increase rates following a policy decision in more than a year. However, the accompanying dot-plot showing the view of each committee member on future rates revealed that they expect more increases in the future, with an average suggesting another 50 basis points of tightening by year end.

Therefore, this could be viewed as more of a skip in the cycle of increasing interest rates, rather than a pause, and suggests that further increases are likely in the absence of significant surprises in economic data. US stock markets initially declined on the news before recovering during Fed chair Jay Powell’s press conference. The remarks from Powell were taken by the market as more dovish than the initial statement, as he said that there was no future commitment to further increases.

The following day the European Central Bank (ECB) raised its benchmark deposit rate by 25 basis points to 3.5%. The messaging around the event was more hawkish than that from the ECB’s US counterparts, as ECB president Christine Lagarde stated the further increases are expected next month. Inflation forecasts from the governing council were also revised higher, supportive of further increases from the current level, which is already at its highest since 2001.

US stock markets rose roughly inline with global benchmarks, ending the week 2.6% higher. Europe ex UK lagged behind a little, perhaps due to the more hawkish narrative from the ECB which led to a larger increase in European bond yields, posting a 1.7% gain for the week.

Over to the BoE

The Bank of England (BoE) are expected to deliver another interest rate increase this week and current market pricing has UK rate setters raising the base rate further than their US and mainland European peers in the second half of the year. High UK inflation remains stickier than in other developed markets and the release of the latest Consumer Price Index (CPI) reading the day before the BoE decision is expected to be a potentially major market moving event.

The previous CPI contained some good news in that in annual terms it returned to single-digit territory after an extended period over 10%, but at 8.7% it still remains uncomfortably high. A further decline is expected to be announced this week, but it is forecast to remain above 8%.

Short-term bond yields in the UK have recently surpassed their peak from last Autumn, moving above 5% to a 15-year high. One obvious pain point for these relatively high interest rates are mortgages, many of which are typically set at fixed rates for two-, three- or five-years. Those deals whereby the fixed-term portion of the mortgage is now expiring face sharply higher borrowing costs than when they were taken out and a typical two-year fixed mortgage now carries an interest rate of more than 6%.

This is becoming a bigger political discussion point as pressure mounts on the government to provide some support to help those already struggling financially and facing the prospect of imminent large mortgage payment increases. Jeremy Hunt, UK chancellor, has ruled out direct support measures, stating that it could push up borrowing costs further and prevent inflation falling back.

UK stock benchmarks gained 1.1% last week while the 10-year gilt yield pushed 17 basis points higher to end at 4.41%. Sterling has also received a boost from the greater relative increase in bond yields, moving up to 1.28 against the US dollar – its highest level since April 2022 and also a level that marks around a 50% recovery of last year’s declines.

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