A mixed week for equity markets as the general mood remained downbeat in the face of climbing inflation and with the pace of economic growth slowing. With prices having retraced since the start of the year (particularly in high-growth stocks), the question is: how much are these concerns already in the price?
The Office for National Statistics announced on Wednesday that UK inflation in May edged higher to 9.1%, having been 9% in April. This is the highest level since March 1982, and the Bank of England forecast it could reach 11% later this year when the energy price cap is hiked again. The news adds further pressure on the central bank to increase interest rates.
Whilst the direction of travel in the short term is widely anticipated to be higher, the debate around where interest rates will peak continues. The market currently predicts that rates could climb to 3.5% in the UK by August next year.
Residential property is one area that looks susceptible if rates were to reach that level. If the Bank of England sets interest rates at 3.5%, this could translate to mortgage rates of roughly 4-6% depending on loan/equity values and credit scores. This would significantly affect affordability for new buyers and for existing homeowners it will likely result in a nasty shock when they come to re-mortgage. The interest element within a mortgage for the latter group could double from their current deals, adding further strain to household monthly budgets.
The price of oil retreated this week on fears an economic slowdown will cause a reduction in demand for the commodity. Brent oil fell from roughly $120 a barrel to $111. Central bankers will be hoping this trend continues as it will help bring some of the inflation pressures outside their control down. Given that the oil price fall was accompanied by further weakness in sterling, whilst the news will be cheered by motorists, it is unlikely to feed into much of a price reduction at the pumps.
For further advice on market trends, contact our investment management team on 01604 621 421.
John Naylor, Chartered FCSI – Head of Investment Committee