Hawkish Fed comments weigh on stock markets
Most major stock markets fell last week as the US Federal Reserve signalled it could raise interest rates at a quicker pace.
In the US, the S&P 500 declined 2.8% after Fed chair Jerome Powell said a 50-basis-point rate increase could be “on the table” at its next policy meeting on 3-4 May. The communication services sector suffered the most as shares of Netflix plummeted following disappointing quarterly results. The Dow and the Nasdaq fell 1.9% and 3.8%, respectively.
Concerns about the war in Ukraine weighed on shares in Europe, with the STOXX 600 finishing the week down 1.4%. The FTSE 100 slipped 1.2% as UK retail sales plunged and consumer confidence fell to a near-record low.
Over in Asia, China’s Shanghai Composite shed 3.9% on concerns about the economic impact of ongoing lockdown restrictions.
Last week’s market performance*
• FTSE 1001: -1.24%
• S&P 5002: -2.75%
• Dow2: -1.86%
• Nasdaq2: -3.83%
• Dax1: -0.15%
• Hang Seng1: -4.09%
• Shanghai Composite: -3.87%
• Nikkei: +0.04%
*Data from close on Friday 15 April to close of business on Friday 22 April.
1Closed on Friday 15 April and Monday 18 April.
2Closed on Monday 18 April.
Stocks slide as UK business sentiment plummets
The FTSE 100 tumbled 1.9% on Monday (25 April) after a survey by the Confederation of British Industry showed business optimism plummeted to a net balance of -35% in April from -9% in January. This was the sharpest pace of decline since April 2020 at the start of the Covid-19 pandemic. Average costs in the quarter to April surged at the fastest rate since July 1975, while domestic prices grew at the steepest pace since October 1976.
The pan-European STOXX 600 also fell on Monday, closing the trading session down 1.8% on fears lockdown restrictions could be introduced in Beijing and further weigh on China’s economy. This overshadowed French president Emmanuel Macron’s election win. The Shanghai Composite sank 5.1% and Hong Kong’s Hang Seng lost 3.7%. In contrast, US indices recovered some of last week’s losses, with the Dow gaining 0.7% as major technology stocks rallied.
UK and European indices followed Wall Street higher at the start of trading on Tuesday. Figures showed UK public sector net borrowing totalled £151.8bn in 2021/22, much higher than £127.8bn forecast by the Office for Budget Responsibility but £165bn less than in the prior financial year.
Powell signals quicker interest rate increases
Last week’s economic news was dominated by Powell’s comments that it was appropriate in his view “to be moving a little more quickly” on interest rate hikes. The central bank chief said there was “something in the idea of front-end loading”, meaning the Fed could raise interest rates more aggressively at the outset to try to rein in inflation. While some economists think inflation may have peaked in March, Powell said the Fed was “not counting on it”.
The Fed laid out a path of steady but slow interest rate hikes only a month ago, but in recent weeks officials have shown support for a more aggressive pace. Whereas in March officials were projecting seven quarter-point rate increases in 2022, they are now suggesting that nine would probably be appropriate. Almost all have expressed support for a 50-basis-point increase in May.
UK retail sales fall sharply
Here in the UK, retail sales fell by a worse-than-expected 1.4% in March following a downwardly revised drop of 0.5% in February, according to the Office for National Statistics (ONS). One of the biggest drivers of the fall was a 7.9% slump in online sales.
“Retail sales fell back notably in March with rises in the cost of living hitting consumers’ spending,” said Darren Morgan, director of economic statistics at the ONS. “Online sales were hit particularly hard due to lower levels of discretionary spending.”
Fuel sales also fell substantially, with evidence suggesting some people reduced non-essential journeys following record high petrol prices. Food sales also continued to fall, dropping for the fifth consecutive month.
Consumer confidence plummets
Separate research by GfK showed UK consumer confidence dropped to its second-lowest level in 50 years in April. The overall consumer confidence index fell by seven points from March to a reading of -38. The scores looking at the next 12 months for personal finances and the general economy were worse than during the 2008 financial crash.
“When rising inflation and interest rates meet low growth and declining incomes, consumers will understandably be extremely cautious about any spending,” said Joe Staton, client strategy director at GfK. “There’s clear evidence that Brits are thinking twice about shopping, as seen in the tumbling major purchase index – now is not considered to be a good time to buy. This is dire news for consumer confidence and with little prospect of any economic relief on the horizon we can only forecast further falls in the index for the year ahead.”
Eurozone business activity rises
Business activity in the eurozone unexpectedly accelerated in April, as a rebound in the service sector offset a near stalling of manufacturing, according to the latest purchasing managers’ index (PMI). The S&P Global flash eurozone PMI composite output index rose from 54.9 in March to 55.8 in April, signalling the strongest rate of expansion since last September.
Business activity among service providers rose at the fastest rate since last August amid falling Covid-19 case numbers and an associated relaxation of health restrictions. In contrast, manufacturing output saw the smallest monthly expansion since the initial pandemic downturn in the second quarter of 2020. Many companies suffered production curbs due to ongoing supply constraints. Demand also cooled, with new orders for goods rising at the weakest rate since June 2020.
Chris Williamson, chief business economist at S&P Global, said the common theme for both sectors was a further surge in cost pressures, driven by soaring energy and raw material costs, as well as rising wages. “Average prices charged for goods and services rose at an unprecedented rate in April as these higher costs were passed on to customers, sending a worrying signal that inflationary pressures continue to build,” he said.