Bank of England Ramps Up Tightening On Inflation Shock

The Bank of England (BoE) accelerated its monetary tightening last week in the latest attempt to tame elevated inflation. Data released on Tuesday showed an unchanged 8.7% headline CPI figure during May[1] although more worryingly, core inflation which excludes volatile components such as energy and food, continued to rise. The BoE response was a thirteenth consecutive rate hike with the base rate lifted by 50bps to 5.00%[2] with additional moves signalled for later in the year. The market response was a sharp one with short dated gilt yields surging; the 2-year gilt yield jumped by 24bps to 5.07% with the magnitude of the inversion in the gilt curve pointing towards a recession on the horizon. Domestic equity markets were also punished, the FTSE 100 and FTSE 250 retreating by -2.4% and -5.1% respectively whilst Sterling slipped against both the US Dollar and the Euro.

It was a disappointing week for equities in general with each of the major indices losing ground. In the US, hawkish comments made by Federal Reserve Chairman Jerome Powell at a Congress testimony proved to be a headwind. The S&P500 posted its first weekly decline for six weeks (-1.4%), with value stocks continuing to underperform[3]. Growing rate hike expectations and recessionary fears were also a headwind on the Continent, the MSCI Europe ex UK index ending the week -2.8% lower. Moving to Asia, the Nikkei 225 in Japan fell by -2.7% although this may have reflected profit taking after an incredibly strong start to 2023. As for China, the Shanghai Composite lost -2.3% in what was a holiday shortened trading week.

Elsewhere, oil prices continued to decline, reflective of growing recessionary concerns and the impact a global economic slowdown would have on demand. Brent crude fell by -3.7% to $73.91 a barrel despite an additional sharp decline in US oil inventory levels. Gold also felt the pressure of higher central bank rates, the precious metal ending the week -1.8% lower at $1,924 an ounce. It was the weakest week for Gold since February[4].

Week Ahead

Final first quarter GDP data is published in both the UK and the US this week although little change is expected to be made to previous estimations. Later in the week, Bank of England mortgage approvals are due on Thursday whilst Nationwide releases its latest House Price Index on the same morning. Other US figures to keep an eye on include new home sales and durable goods orders, both covering May. In the Eurozone, all eyes are likely to be firmly on Friday’s inflation data with headline CPI expected to have retreated by a further 50bps to 5.6% during May. Unemployment figures are also due on the same morning with an unchanged 6.5% jobless rate currently forecasted. It’s a busy week for Japanese numbers, retail sales, industrial production and retail sales all released throughout the week. Chinese focus will be on Friday’s official Purchasing Manager Indices (PMI’s) which will cover activity levels of the services and manufacturing sectors during June[5].

Past performance is not indicative of future performance.

The value of an investment may fall as well as rise. You may get back less than the amount invested.

The value of investments may fall as well as rise purely on account of exchange rate fluctuations.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies. “FTSE Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

The information contained does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.

Full advice should be taken to evaluate the risks, consequences and suitability of any prospective investment. Opinions provided are subject to change in the future as they may be influenced by changes in regulation or market conditions. Where the opinions of third parties are offered, these may not necessarily reflect those of Rowan Dartington.

Rowan Dartington is part of the St. James’s Place Wealth Management Group. Rowan Dartington & Co. Limited is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales No. 02752304 at St. James’s Place House, 1 Tetbury Road, Cirencester, England, GL7 1FP, United Kingdom.

[1] Office for National Statistics, 26/06/23

[2] Bank of England, 26/06/23

[3] T. Rowe Price, 26/06/23

[4] Refinitiv, 26/06/23

[5] Forex Factory, 26/06/23

SJP Approved 26/06/23