Stocks are rising this morning as the latest US CPI inflation data all but guarantees the Federal Reserve will not raise rates later on today, instead taking a pause. Stocks pumped and the dollar dumped as short-term yields pulled back sharply. The Fed does not normally surprise the market. But it could. And markets are still betting the Fed does raise in July.
Wall Street rallied overnight with the S&P 500 up 0.7 per cent and even the industrial Dow rising 0.43 per cent. The tech-heavy Nasdaq notched a 0.83 per cent gain. Closer to home and the FTSE 100 has edged slightly higher this morning, up 0.22 per cent, but there are more domestic issues, which we’ll discuss below. The DAX and CAC 40 are flying with 0.5 and 0.76 per cent rises respectively.
All this came after US consumer price data showed headline annual inflation slowed to 4 per cent in May, down from almost 5 per cent in April. But I just don’t see why the Fed should wait a month with core CPI where it is. It does not make sense and makes communication trickier – does the Fed really pause with $300bn in new Treasury issuance coming and stock markets on the up? Core inflation has been steady at 5 per cent for 6 months – does the Fed say look you have to accept 5 per cent inflation now? Higher for longer rates plus higher for longer inflation.
And this brings us neatly to Blighty. Well, it’s not good. Yields on two-year gilts climbed to the highest level since 2008 on the back of strong labour market figures. Expectations now that UK interest rates would stay higher for longer.
Figures showed that regular pay growth was 7.2 per cent between February and April this year – the highest growth rate seen outside of the pandemic. Unemployment remains low at 3.8 per cent, while vacancies fell. Markets now expect the Bank Rate to peak at 5.75 per cent by the end of the year: definitely into recession territory now and there’s just no way households survive those kinds of mortgage rates. Hermione Taylor has more on that here.
The Trader is written by Neil Wilson, chief market analyst at Finalto
