Written by Ashwin Gurung
According to official figures from the Office for National Statistics, the UK’s annual headline inflation fell to 2.3% in April, its lowest level since July 2021, down from 3.2% in March. However, this decrease was less than the anticipated 2.1%. Similarly, annual services inflation declined slightly from 6.0% to 5.9%, also falling short of expectations. These outcomes may have reduced the likelihood of the Bank of England (BoE) cutting interest rates as early as June. While inflation is on a downward trend and nearing its target rate, it remains sticky.
During the week, the UK Prime Minister Rishi Sunak announced a snap general election for July 4th. Some market participants believe that this development makes a rate cut in June even less likely than before. However, it is important to note that the BoE has independence from the Government in terms of how it carries out its responsibilities i.e., free from political influence, so the general election should have no direct impact on the decision of rates cuts in June.
Similarly, from an investment perspective, we don’t expect the upcoming general election to significantly explain the performance of UK stocks. Data has shown that the election’s impact is much lower compared to other economic factors such as monetary policy decisions, and their impact on markets is also incredibly difficult to foresee. Whatever the outcome, we remain positive on UK Equities as they continue to benefit from companies reporting positive earnings, implementing stock buy-backs, and higher mergers & acquisitions activity where we have seen numerous UK companies being bid for at premiums to their valuation. UK listed companies are considered to be attractively priced by both domestic and foreign companies.
In the US, market expectations are also leaning towards a delay in anticipated rate cuts due to continued strength in consumption and higher economic growth. The Federal Reserve’s minutes from April’s policy meeting also highlighted the worry amongst Fed officials that there has been more limited progress on inflation than hoped. Members expressed a lack of confidence in proceeding with rate cuts given this uncertainty.
On the other hand, Japan is dealing with the opposite challenge of keeping inflation sustained. In April, Japan’s core inflation (which excludes fresh food) declined for a second consecutive month to 2.2%, while staying above the Bank of Japan’s (BoJ) price target. However, the trend is expected to reverse in the upcoming months as numerous Japanese companies prepare to implement the most substantial wage hikes in over three decades in spring wage negotiations. The BoJ is also optimistic that this will spur both spending and prices, ultimately increasing inflation.
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