The highlight this week was the UK inflation data announced on Wednesday morning by the Office for National Statistics. Having proven stickier than many had predicted in recent months, there was a collective sigh of relief to see inflation fall from an annual rate of 8.7% in May to 7.9% in June. The figure was lower than the 8.2% forecast by economists and marks a 15-month low for the UK.
As a result of the better-than-expected inflation data, UK interest rate expectations fell. Markets are now pricing in a 50% chance of a 0.5% increase when the Bank of England next meet on the 3rd August and a terminal rate below 6%. This compares to an 85% chance and peak rates of 6.25% forecast last week. Mortgage holders with cheap deals expiring soon will be hoping that this reduction feeds into some of the eye-watering fixed-rate mortgage offers currently available.
Whilst the market cheered the news, those sectors sensitive to interest rates benefited most, such as property, infrastructure, and renewables companies. These areas saw strong gains as the largely predictable income they provide looks more attractive as interest rate expectations are tempered. UK government bonds and investment-grade corporate debt also enjoyed a welcomed bounce.
Earnings season picks up the pace next week with a number of US mega-caps (Microsoft, Alphabet, Amazon and Meta) reporting. Investors are keen to see if the uplift in sentiment seen in the first half of the year is justified by the numbers and the all-important forward guidance.
John Naylor, Chartered FCSI – Head of Investment Committee