With the pace of inflation slowing, the US central bank has put a hold on interest rate rises, which helped to support global stock markets in June.
US stocks edged higher after the US Federal Reserve (Fed) paused interest rate hikes after more than a year of consecutive increases. The Fed said it would hold interest rates steady at 5% to 5.25%, a high not previously seen since the 2008 financial crisis. The US central bank has been increasing interest rates to dampen the economy and bring the inflation rate down to its 2% target. Even with the pause, Fed officials have suggested a further two rate rises may be on the way later this year.
As the world’s largest economy, what happens in the US has implications around the world. For instance, when US interest rates rise, the value of the US dollar relative to other currencies tends to rise too. Any overseas governments or companies that have debts denominated in US dollars will find it harder to meet the interest payments on those debts.
While inflation remains high, it appears to be turning a corner. However, ongoing price increases are putting pressure on the Fed to maintain high interest rates. US inflation dropped to its lowest level in over two years at 4% in May, down from April’s 4.9% jump. Share prices rose after an agreement on the US debt ceiling was struck, preventing a default on the government’s debt. The bill passed in the House of Representatives and the Senate, ensuring the government’s ability to borrow and cover existing debts.
The S&P 500 index was boosted thanks to the strong performance by market heavyweights Amazon, Apple and Tesla, recovering 21% from its lows in October 2022. While the US economy is holding up, it appears to be losing steam. Production at US factories stalled in May as manufacturing struggled under the weight of rising interest rates. Job creation in the US has remained surprisingly robust despite concerns of a slowdown. The US added 339,000 jobs in May, while unemployment increased slightly to 3.7%.
UK inflation remains high
Government bond prices have slumped amid persistent inflation (which has not yet begun to slow as it has in the US) and the prospect of further interest rate hikes. The Bank of England raised rates for the thirteenth consecutive time, increasing them by 0.5 percentage points to reach 5%. Mortgage borrowers have seen their costs soar in recent months and analysts are predicting further rate hikes may be needed to bring inflation under control.
May’s inflation rate remained unchanged at 8.7%. Core inflation, which excludes volatile items such as energy and food, reached a 31-year high of 7.1%, up from the previous month’s 6.8%. While food inflation fell, it remains alarmingly high at 18.3%. UK unemployment fell to 3.8% in the three months to April, while wages are growing at their fastest rate outside of the pandemic, putting more pressure on the Bank of England to raise interest rates.
Despite the increase in earnings, the cost of living continues to bite, with price rises eating into household budgets. The UK economy returned to growth in April following a dip the previous month, with GDP rising by 0.2%. Expectations that interest rates will keep rising also lifted the value of the pound.
Euro area enters recession
The euro area slipped into a recession during the first three months of the year as high energy and food prices dampened household spending. GDP contracted by 0.1% in both the final quarter of 2022 and the first quarter of 2023. A technical recession is defined as two consecutive quarters when the economy contracts.
It comes after Germany, the region’s largest economy, also slipped into recession. Inflation in Europe has fallen to its slowest pace since Russia invaded Ukraine, bolstering hopes that policymakers could start reducing interest rates this summer. Consumer prices in the euro area increased by 5.5% in June compared with the previous year, a decrease from the 6.1% recorded in April.
Global stock markets were boosted by growing expectations that China will need to increase its economic stimulus measures as its recovery falters. China’s post-pandemic economic rebound is displaying signs of losing the initial momentum observed in the first quarter. Beijing has eased its pressure on real estate developers in the last year, following a crackdown on the sector.
However, China’s property market is still struggling to turn around, despite signs of growth earlier this year. Retail sales and investment have also fallen short of expectations, while the youth unemployment rate is rising. Chinese exports contracted more than expected in May and imports are also falling.