UK Equities Sink As Stubborn Inflation Raises Rate Expectations Again

UK equities languished last week as the latest round of CPI Inflation data revealed that price rises were not slowing as fast as economists had hoped. Whilst the headline index did indeed fall, the 8.7% figure was a notable drop from the previous 10.1%[1], it was some 50 basis points (bps) ahead of forecasts with food price inflation in particular remaining stubbornly high. Subsequently, expectations of where domestic interest rates may settle jumped once again with some predicting that they may need to reach 5.5% next year in order to fully get inflation under control. The FTSE 100 and FTSE 250 retreated by -1.7% and -2.6% respectively whilst gilt yields surged across the curve. The 2-year security saw its yield jump by 54bps to 4.48% whilst the 10-year security rose by 34bps to 4.33%.

In the US, the S&P 500 added +0.3% with investors still closely monitoring the debt ceiling negotiations in Washington. The tech heavy NASDAQ composite meanwhile rose by +2.5% thanks largely to a +24.0% surge in semiconductor chip manufacturer NVIDIA which spiked on the back of a strong set of results[2]. Moving to Europe, the MSCI Europe ex UK index declined by -1.5 due to growing concerns relating to the economic outlook on confirmation that Germany slipped into recession during the first quarter of the year. As for Asian equities, the Shanghai Composite slipped by -2.2% as its post COVID recovery continued to stutter whilst in Japan, the Nikkei 225 rose by +0.4% having reached its highest level since 1990.

Elsewhere, oil prices inched upwards higher for a second straight week, brent crude concluding Friday +1.8% higher at $77 a barrel. This largely related to data showing a sharp fall in US crude stocks which was viewed as a strong demand indicator for the country, and comments by the Saudi oil minister who hinted that further OPEC production cuts could be on the horizon. As for gold, the precious metal recorded its largest weekly loss since the start of the year having fallen by -1.4% to $1,940 an ounce on the back of a strengthening US dollar[3].

Week Ahead

US focus this weekly is likely to be firmly on Friday’s labour market report with the unemployment rate expected to have risen modestly last month. The rate of job creation and pay growth are also forecast to have slowed. Additionally, the Federal Reserve releases its bimonthly Beige Book on Wednesday which includes various key data points from around its 12 district banks. In the UK, it’s a quiet week for key economic figures with the Bank of England consumer report on Thursday the only notable publication. On the Continent, Thursday is a key day for data with both CPI inflation and unemployment released. The former is expected to have retreated further this month (forecast of a 70bps drop to 6.3%) whist unemployment is set to remain at 6.5%. It’s a busy week for headline figures from Japan with unemployment, industrial production and retail sales all due. As for China, official Purchasing Manager Indices (PMI’s) are the notable releases on this occasion.

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[1] Office for National Statistics, 30/05/23

[2] T. Rowe Price, 30/05/23

[3] Refinitiv, 30/05/23

SJP Approved 30/05/23