Written by Dominic Williams

The most recent US inflation data, released on Wednesday, exceeded forecasts for the second consecutive month. The annual inflation rate reached 3.5 per cent, surpassing the expected 3.4 per cent, marking its highest level since September. Core inflation, excluding volatile items like food and energy, rose to 3.8 per cent, exceeding forecasts of 3.7 per cent. This increase was driven by pressures in service sectors, such as healthcare and car insurance. However, it’s worth noting that the rise in car insurance is influenced by lagging factors, particularly the previous increase in car prices, which are only now being reflected in insurance prices. The higher-than-expected figures, also observed in January and February, have raised concerns among policymakers that inflation may be persistently high, thereby delaying expectations of an initial rate cut. Nevertheless, Fed Chair Jay Powell maintains optimism that inflation will gradually decline towards the 2.0 per cent target. In GBP terms, the S&P experienced a 0.1 per cent decline over the week, reacting to ongoing inflation concerns and heightened tensions in the Middle East. The stronger Dollar contributed to a less negative return in GBP terms.

On Thursday, the European Central Bank (ECB) opted to maintain interest rates at 4.0 per cent for the fifth consecutive time, a historical high. However, the bank conveyed a strong message indicating potential rate cuts at their upcoming June meeting, contingent upon increased confidence in inflation moving steadily towards the 2.0 per cent target. The latest inflation figures, with March numbers at 2.4 per cent, suggest that their inflation target has almost been achieved. Officials acknowledged there has been a continued decline in inflation, with most indicators of underlying inflation and wage growth showing signs of easing.

MSCI Japan emerged as a top performer for the week, rising by 2.5 per cent in GBP terms. Following the release of US inflation data, the Yen depreciated to a 34-year low against the US Dollar. This decline prompted speculation about potential intervention by the Bank of Japan (BoJ) to support the Yen. However, the BoJ Governor Kazuo Ueda dismissed the idea of supporting the weaker Yen through a rate hike, asserting that the central bank would not alter its monetary policy directly in response to exchange rate fluctuations.


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