Prospects for inflation and interest rates continued to garner headlines during June as investors digested news of rising prices alongside a more hawkish tone from the US Federal Reserve. Share prices were knocked by speculation that gathering inflationary pressures could encourage central banks to taper off their economic stimulus measures and consider raising ultra-low interest rates.
- US CPI surged to 5% YoY
- US rates may rise sooner than previously expected
- The oil price rose to its highest level since October 2018
To view the series of market updates through June, click here
Fed’s hawkish tilt: Prospects for inflation and interest rates continued to garner headlines during June as investors digested news of rising prices alongside a more hawkish tone from the US Federal Reserve (Fed). Share prices were knocked by speculation that gathering inflationary pressures could encourage central banks to taper off their economic stimulus measures and consider raising ultra-low interest rates. Amid growing optimism about the global recovery, Brent crude oil rose to US$76 per barrel – its highest level since October 2018 – during the month.
“Fed policymakers have continued to underplay concerns over inflation”
Rising prices: Although Fed policymakers have continued to underplay concerns over inflation, investors were rattled by the news that the annualised rate of US consumer price inflation had surged from 4.2% in April to 5% during May, posting its fastest growth since August 2008. Meanwhile, core consumer price inflation – which excludes volatile items such as food and energy – rose by 3.8%, representing its most rapid year-on-year rise in almost 30 years.
Transparent tapering: Investors were unsettled by indications from Fed officials that interest rates might rise in 2023 rather than 2024, reflecting a swifter recovery than previously expected. The yield on the ten-year US Treasury bond rose sharply in response, but subsequently subsided to end the month at 1.45%. Fed Chair Jerome Powell emphasised that the process of tapering off the Fed’s asset purchase programme would be “orderly, methodical and transparent”. The Dow Jones Industrial Average Index fell by 0.1% over June.
ECB remains dovish: Against a more benign inflationary backdrop, the European Central Bank (ECB) confirmed that it will maintain its bond-buying programme until March 2022 and insisted that it would continue for as long as necessary. According to ECB President Christine Lagarde, eurozone inflation “is expected to rise further in the second half of the year, before declining as temporary factors fade out”. During June, the Dax Index rose by 0.7%.
UK to join TPP? The Trans-Pacific Partnership (TPP) invited the UK to begin talks over joining the trade bloc. At present, the TPP has 11 members: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Elsewhere, Japan’s first-quarter economic contraction proved less severe than initially calculated. The country’s economy shrank at an annualised rate of 3.9% during the period, compared with an earlier estimate of -5.1%, although consumer spending remained weak. The Nikkei 225 Index fell by 0.2% during June.
A version of these market briefings are available to use in our newsletter builder feature. Click here
