Market Overview|Quilter Cheviot

Talking tough

Market Overview from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

Central Banks continued to push up interest rates last week amid their ongoing battle against inflation but we got a very divergent message from the Fed and the Bank of England. As expected, the Fed raised rates to 4% but Jay Powell dashed investor hopes for a more dovish message by saying that they are still some way from a pause and that terminal rates could end up being above 5%. This hawkish rhetoric was also backed up by another strong nonfarm payrolls report on Friday which confirmed that the US jobs market is still in rude health.

However, it was a different message from Bank of England governor Andrew Bailey following their own 0.75% increase as he chose to focus on the risks to UK economic growth and pushed back strongly against the market’s lofty expectations for future hikes, saying they would trigger a two-year recession. This makes sense given that taxes are likely to go up in next week’s autumn statement although the Bank needs to be careful about sounding too soft on inflation at a time when other policymakers are talking tough.

Ultimately, US equities fell on the week but UK and European equities posted positive returns as rumours circulated about an impending end to China’s zero-Covid policy. Bond yields also rose modestly.

Looking ahead this week, the main event will be US midterm elections on Tuesday with the Republicans expected to take back control of the House and possibly also the Senate. US inflation numbers are also out on Thursday with the headline rate expected to fall below 8%.

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