Hawkish Federal Reserve surprises markets

Financial Market Update for the Week Ending 22 May

By Will Bradwell
Attivo Investment, part of Attivo Group

Key Highlights:

  • Probability of a June rate hike increases in the US
  • Japanese GDP beats estimates
  • Disinflation returns to the UK as consumer price data drops

The probability of an interest rate hike in the US in June, as implied by the markets, has drifted steadily lower over recent months. Volatility in many major asset classes has driven most investors and policy makers alike to thinking that now is not the time for another rate hike. However, minutes released from the latest Federal Reserve meeting to discuss interest rate expectations in the US, have revealed a more hawkish than expected tone amongst the policy setting committee. In particular, it was mentioned that “most participants” in the committee supported a June increase should the job market and growth figures support it, which they appear to be doing so. The renewed prospects of a June hike led to a rally in the dollar against most major currency pairs and weighed heavily on commodity prices.

Japanese equity markets gained impressively on the week with the Topix increasing 1.76%. As well as benefiting from a weakening yen against the dollar, GDP data released showed that economic growth had increased much faster than expected over the first quarter at 1.7%.

Economic releases during the week from the UK proved to be somewhat weaker than anticipated. Consumer price data indicated a 0.3% rise in inflation year-on-year after a rise of 0.5% for the prior month. Although the drop in inflation growth is mainly down to the timing of Easter and its relative impact on the prices of transport and airfares from last year, the inflationary environment is still subdued.

Corporate events in the coming week will again be relatively quiet although in the UK we will hear results from the defensive, dividend paying stocks; Severn Trent and United Utilities. On the macro data front, attention will be focussed on GDP numbers from Germany (expected to be up 0.7% on the quarter) and from the UK (0.4% quarter on quarter increase expected).

Earnings releases

  • Monday 23 May – MITIE Group, Ryanair Holdings
  • Tuesday 24 May – Severn Trent, Cranswick
  • Wednesday 25 May – Marks and Spencer Group
  • Thursday 26 May – Vectura, United Utilities
  • Friday 27 May – Bodycote (Trading Update)

Economic releases

  • Monday 23 May – Manufacturing and composite PMIs (Eurozone)
  • Tuesday 24 May – GDP (Germany), ZEW (Germany)
  • Wednesday 25 May – Bank of Canada Interest Rate Decision
  • Thursday 26 May – GDP (UK), Durable Goods (US)
  • Friday 27 May – CPI (Japan)

Sources: Financial Times, Bloomberg

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