A month of rate announcements
While it has been a key month for interest rate announcements there has been little by way of change.
In April, UK consumer confidence reached its highest level since January 2017 according to data published at the beginning of the month by YouGov and the Centre for Economics and Business Research. This is somewhat juxtaposed to the data from the Office for National Statistics, which revealed the weakest expansion in GDP since 2012. No doubt this was considered by the Bank of England with regards to their rate setting monetary policy committee (MPC) decision on 10th May.
Confidence data is generally seen as a leading indicator for growth, while the GDP figures suggest the economy is not yet ready to bear higher interest rates. By the time the rate decision came, markets had given up hope of a rate rise – with the probability of a hike just 13% on the day of the announcement. Needless to say the base rate remained at 0.50% after a 7-2 vote.
Inflation is likely to start falling faster than previously expected in the short term, the Bank noted, since the MPC judged that sterling’s depreciation since the Brexit vote would have a lesser upwards effect on import prices. However, in order for inflation to return to 2.0%, the MPC stuck to its previous recommendation that three interest rate hikes of 0.25% each should be implemented over the next three years, though these may not be imminent. On 22nd May the pound jumped almost 0.5% after Gertjan Vlieghe (a Bank of England policymaker) warned that interest rates could rise up to six times in the next three years.
The pound has struggled this month, dropping to a four month low against the US dollar following weak GDP, a sharp decline in retail spending (biggest fall since 2012) and downbeat UK manufacturing data along with stronger initial jobless claims and trade balance figures out of the US.
In the US, the Federal Reserve held interest rates steady and expressed confidence that a recent rise in inflation to near the central bank’s target would be sustained, leaving it on track to raise borrowing costs in June. The committee played down a recent slowdown in economic and job growth, stating activity had been expanding at a moderate rate. It said inflation had ‘moved close’ to its target and that ‘on a 12 month basis is expected to run near the committee’s symmetric 2.0% objective over the medium term’. This, in conjunction with robust US data, saw the dollar strengthen this month.
Economic growth in the Eurozone economy lost some of its momentum at the beginning of 2018, although the expansion continued at a healthy pace. Eurozone GDP expanded by 0.40% which was in line with expectation according to figures in May. Inflation in April fell year-on-year to 1.2%; it had been expected to be unchanged at 1.3% making a total withdrawal of monetary stimulus by the ECB marginally less likely this year.
With the rising dollar, Gold has drifted lower. We also saw figures – published in May by the World Gold Council – that showed demand for the precious metal had dropped in the first three months of the year to post its weakest first quarter since the financial crisis in 2008. Proposed US interest rate rises seem to have lured investors elsewhere and prices have been subdued this month.
Oil prices have had a rather choppy start to 2018 with a low of circa US$59 a barrel in February on the West Texas Intermediate (WTI) index to peaking earlier this month at almost $72. Following President Donald Trump’s decision to pull the US out of the Iran nuclear deal we saw oil prices surge, reaching a four year high – largely due to uncertainty over sanctions that may be re-imposed on Iran.
FTSE 100 has hit a record high this month as an easing in US-Chinese trade tensions and a strengthening USD helped the internationally exposed index. UK Equities enjoyed a broad-based rally, with all sectors making gains while financial and energy provided the strongest boost. The FTSE 100 has gained nearly 5% so far this month.
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