Inflation Worries Send Markets On Another Rocky Ride As UK Economy Shrinks

Published on
  • The UK economy shrank again in April as businesses felt the impact of price rises.
  • GDP declined by 0.3% last month – a worse outcome than expected with all sectors shrinking.
  • Asian stock markets have fallen sharply as soaring prices in America triggered fears there will be tougher on inflation.
  • The US dollar strengthened to 135 Japanese yen for the first time in over two decades.
  • Updates from Tritax Big Box REIT, Ferrexpo and Countrywide Properties

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Q1 2022 hedge fund letters, conferences and more

Early Market Moves:

Level Change %
FTSE100 7,249 -0.9
EuroSTOXX (Futures) 3,535 -0.7%

Inflation Fears

"Markets have set off on another rocky ride over inflation fears, following a stronger jump in US consumer price index that was greater than even analysts’ higher estimates. On Wall Street on Friday night the S&P 500 index plunged 2.9% with the tech-heavy Nasdaq benchmark shedding 3.5%. Shares in Asian markets continued the weakness, with Japan’s Nikkei index shedding 3% overnight and Hong Kong’s market tumbling 3.4%.

Clearly, investors are now fretting that the economic data will force the US Federal Reserves hand into pushing interest rates up, further and faster than previously forecast. Some are now calling for the Fed to raise by as much as 0.75% this month or next and the yield on two year Treasuries rose up through 3% overnight. US government bonds are now yielding more than 3% pretty much all the way along the curve as far as the 30y benchmark.

Meanwhile back home UK Government bonds have seen their yields rise by around 0.1% at the longer end of the curve, taking the 10y benchmark to within touching of 2.5%, whilst the 12 month bond is yielding 2.0%. That all adds up to further increases in interest rates ahead.

In the UK, the Office of National Statistics reported that GDP in April declined by 0.3%, with all sectors of the economy contributing to the slump. The drop was larger than expected, with analysts having previously estimated that the economy would have inched ahead by 0.1% in the month. Looking deeper into the GDP data, the biggest contributor was a sharp fall in Healthcare, itself driven by the fading of the pandemic and consequent slump in Track and Trace activity. Consumers proved surprisingly resilient, something we have seen in recent retail sales data. Consumer-facing services rose by 2.6% in the month. Policymakers will be fretting that the UK is now generating negative GDP growth with rapidly accelerating inflation. This will inevitably lead to a close focus on labour market data due later this week. The Bank of England will be concerned at the potential for a wage-price spiral if labour markets remain tight whilst prices continue to rise.

On the stock market, news is muted, with most companies yet to release half year trading updates. Tritax Big Box REIT revealed that a new tenant, described as a leader in data storage and management services, had taken a lease on 1m square feet of buildings at its Symmetry Park development at Rugby. Tritax say this will be one of the biggest deals to be seen in UK real estate this year and offers them a return of between 6% and 8% on their investment. Construction is underway, with completion during 2023. The shares barely moved at the market opening.

Ferrexpo, which produces high grade iron ore pellets for the global steel industry from facilities in Ukraine has revealed a further deterioration in operating conditions. Ports on the Black Sea remain closed and Russian air strikes on Ukrainian railways have intensified. Production year to date had held up well, but the group now see a greater impact on operations given the growing repairs needed to the rail network. The shares lost 3.7% in early trading

Countryside Partnerships revealed on 30 May it had turned down takeover proposals from Inclusive Capital, viewing the offers as inadequately reflecting the future value of the group. Today Countryside have announced that after discussions with significant shareholders, the group is formally putting itself up for sale. The news had little impact on the stock, which was trading down 1.9% in the first minutes after market open this morning."

Article by Steve Clayton, fund manager at Hargreaves Lansdown Select

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