Market Update: The pace of price rises cools at home and abroad

Market Update: The pace of price rises cools at home and abroad

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US inflation has eased to its lowest level in two years but is still well above the Fed’s 2% inflation target. The UK’s annual inflation rate has also fallen but remains stubbornly high at 10.1%.

Government bonds and global stock markets rallied in April after cooling inflation bolstered hopes the US Federal Reserve (Fed) may slow its rate hikes. US annual inflation fell from 6% in February to 5% in March, the slowest pace for price increases in almost two years. However, the rate is still well above the Fed’s 2% inflation target

Oil prices jumped to $86 a barrel as members of the Opec+ cartel agreed to a surprise cut in production. The move, led by Saudi Arabia, will take effect in May and reduce the supply of crude by more than one million barrels a day. The share prices of large oil producers surged in response.

US manufacturing output dips

Production at US factories fell for the first time this year as companies showed signs of reducing investment plans. Meanwhile, the retail sector experienced a fall in sales from February, which was steeper than the slight decline in January. The decrease adds to recent indications that the economy is slowing, as consumers struggle with the effects of elevated inflation that has persisted for more than a year, as well as higher interest rates.

The jobs boom in the US is slowing, while unemployment remains low in the face of sharply higher borrowing costs. The US added 236,000 jobs in March, down from 326,000 the previous month, in a sign of gradual weakening in the labour market. The unemployment rate remains near all-time lows at 3.5%. Economists are watching to see if banks pull back on lending in the wake of the collapse of SVB and Signature Bank in March and then First Republic at the end of April.

UK inflation falls

UK inflation defied expectations to stay in double digits, as the cost of living crisis continues to bite. The rate of price increases fell to 10.1% in March, down from 10.4% in February. Despite inflation cooling, it remains stubbornly high, raising the prospect of further interest rate rises from the Bank of England.

Britain’s economy flatlined in February with no growth in GDP after a wave of public sector strikes weighed on activity. With recession fears easing, the pound hit its highest level against the dollar in 10 months.

China’s exports surge

China had unexpectedly strong exports in March, bolstering hopes that Beijing will meet its growth target of 5% for the year. Despite weak global growth, exports from China reached nearly 15% in March, fuelled by sales of electric vehicles and their components. China’s manufacturing sector has struggled to emerge from the shadow of the pandemic and consumption has been weak.

In a sign that upward pressure on prices is easing, the euro area’s annual inflation rate dropped sharply from 8.5% in February to 6.9% in March. Inflation across the region has fallen more steeply than expected to its lowest level for more than a year after a decline in energy costs. Despite an improving inflation outlook, the European Central Bank is widely expected to raise interest rates again in May.

OMPS Chart May 2023