The risk-off tone continued this week, with data and central bank rhetoric further supporting the shift towards ‘higher for longer’ interest rate views, particularly in the US. Investors have also been grappling with the increased risk of further escalation in the middle east conflict, after reports that an Israeli missile struck Iran last night, in retaliation for last weekend’s attack. Global equities have bounced back a little since their early morning lows and now sit just over 2% down on the week. European indices have outperformed again, possibly assisted by recent Euro weakness (USD strength) and near-term interest rate cuts looking a little more likely in the Eurozone.
March US retail sales rose more than expected and employment data continues to paint the picture of a very healthy US economy. Multiple Fed speakers appeared to acknowledge this throughout the week and, with disinflation appearing to stall more recently, they have mostly been highlighting the need for a cautious approach to reducing interest rates. Chairman Powell warned that it was likely to take ‘longer than expected’ for inflation to return to their 2% target and market pricing now predicts that the first full cut will be around September. The 10-year US treasury yield is up around 0.1% week-to-date, at 4.61%.
UK inflation cooled in March, but the drop in Consumer Price Index (CPI) was slightly less than anticipated, with headline coming in at 3.2% (vs. 3.4% in Feb and 3.1% expected) and core at 4.2% (vs. 4.5% in Feb, and 4.1% expected). Services inflation, which can be heavily influenced by wages, remains high at 6% and annual wage growth data also came down slower than expected. All of this has made traders and economists a little more cautious about the likely pace of Bank of England base rate cuts too.
