While the minutes were mildly hawkish, we still believe that US interest rates have peaked and that the Fed will start cutting US interest rates in the not too distant future, given soft CPI inflation readings coupled with the increase in trade tensions since the Fed’s last meeting.
Furthermore, James Bullard, the St. Louis Fed President, told Bloomberg Television this week that the Fed may have “overdone it” when it increased interest rates last December!
Likewise, this week’s weaker-than-expected UK inflation reading (core CPI was unchanged at 1.8%) continues to undermine the BoE’s insistence that UK interest rates need to be higher.
In the UK, Brexit took centre stage – not because of the European elections or milkshake throwing, but because of Theresa May’s ‘new’ Brexit deal proposal (which immediately flopped) and her subsequent resignation announcement this morning (Friday 24 May 2019).
While the outcome of the European elections won’t be known until Sunday night (26 May 2019), they are fairly easy to predict and the only election that now counts is the one for next Tory leader!
As such, the odds of a no-deal Brexit have risen, given the next leader will need the support of Conservative Party members – and given the likely success of Nigel Farage’s Brexit Party, the Tories are unlikely to appoint a moderate leader. This suggests that Boris Johnson or another hard-Brexit candidate, such as Dominic Raab, are most likely to succeed Theresa May.
Although the FTSE-100 fell just under 1%, it was supported by a slight weakening in the pound (which fell from $1.2731 to $1.2714) – a weaker pound is good for the FTSE-100, as it boosts returns for exporters and the value of overseas earnings.
However, it was India’s BSE Sensex 30 that was one of the best performing equity markets over the week as Narendra Modi was re-elected as Prime Minster.
This coming week we have the Fed’s preferred inflation gauge, the PCE, and the second reading of US Q1 GDP.
Investment Management Team