As the UK inflation continues to rise and the Bank of England increases interest rates, markets start to feel the pressure.
Inflation was back in the news in the week between June 19th and June 23rd. Once again, all the major central banks in the world expressed hawkish intentions, damaging market performances.
But first let’s look at some numbers:
- In the United States, the S&P 500 dropped by -2.18%, the Nasdaq Composite by -2.88% and the Dow Jones by -2.09%;
- Similarly, European stock exchanges fell this week, with London predictably dropping by 2.43% and Frankfurt continuing its downward spiral ending at -3.15%;
- Finally, Asian markets also closed the week in red, with Tokyo ending at -2.92%, Hong Kong at -5.15% and Shanghai at -1.01%.
Inflation, inflation and more inflation
By far the most relevant market mover this week, UK inflation in May was higher than expected. Consumer prices in the United Kingdom rose to 8.7% year-on-year, up from 8% in April.
A catastrophic performance that positions the UK as the highest inflation in the G7.
Reuters polled analysts predicted an 8.4% inflation measure, badly missing the real amount.
Core inflation also increased to 7.1%, reaching a 31-year high. Core inflation is an index measuring consumer prices without more volatile products such as energy and food. It’s a more concrete way of measuring inflation on every day life.
Inflation in the United Kingdom is set to remain for a long time, signaling disaster for short-term mortgage holders (the majority of British homeowners).
Hawkish signals from central banks
As a result of high inflation, the Bank of England raised interest rates by a massive 50 basis points. This is the 13th consecutive time the BoE has increased rates, even as other central banks slow down their hawkish moves.
Earlier this month, the American Federal Reserve paused its hikes after inflationary data showed a 0.9% decrease (more than expected).
In the European Union, inflation dropped more than expected too despite remaining high at 6.1%.
Nevertheless, both the Fed and the European Central Bank have expressed their intentions of raising rates at least two more times in 2023. In fact, the ECB has not given any time limit for when to stop the increases as inflation is still too high.
After the BoE raised rates by 0.5%, every major stock exchange dropped in value. Markets are feeling the pressure and were not expecting a similar increase from the BoE.
Germany and the Eurozone have already fallen into recession and will likely be followed by the United Kingdom. It remains to be seen whether or not the US will follow suit: the Fed’s hawkish intentions surely make it a possibility.
