Market Update

Global equity markets have experienced a tumultuous week, seemingly awakening to a message we've been emphasizing for months: Aggressively raising interest rates won't quell inflation but could harm economic growth.
The current bout of high inflation isn't a consequence of excessive demand; it's a result of disruptions in supply chains and the conflict in Ukraine. While we acknowledge that inflation will persist throughout the year, it's likely to naturally recede in 2023 without the need for central banks to aggressively hike interest rates. This phenomenon is known as the "base effect," where the price increases experienced this year will no longer factor into future inflation calculations.
Therefore, a widespread increase in interest rates won't bode well for the global economy. The steep surge in energy costs and elevated food prices are already limiting disposable income, not to mention the recent tax increase in April. As we've previously explained, higher interest rates won't accelerate oil production or increase crop yields.
Furthermore, considering that consumer spending accounts for approximately 60% of the UK economy and two-thirds of the US economy, higher interest rates will only further curb consumption, potentially slowing down or even reversing the global economy. This is because higher interest rates translate to increased debt repayments, adding to household financial pressures.
The latest evidence of the growing financial strain on households is evident in the UK's Consumer Confidence reading for Friday, May 20, 2022. It hit its lowest level since records began in the 1970s, meaning that consumer sentiment today is lower than it was during the peak of the global financial crisis in 2008/9 and the recession in the early 1990s when unemployment surged above 10%.
The squeeze on consumer spending is also affecting various companies heavily reliant on consumer demand. For instance, in the UK, Greggs, known for its pastries and sausage rolls, has noted rising costs and warned that passing these costs onto consumers may lead to reduced demand, given the financial strain customers are already facing. Similarly, furniture retailer Made.com has cautioned that sales are beginning to decline as consumers grow cautious about making substantial purchases.
While we recognize that the current volatility in the equity markets can be distressing, it's crucial to bear in mind that markets often exhibit both exaggerated optimism and pessimism. Consequently, it's advisable not to get caught up in the day-to-day market noise, as it can lead to impulsive decisions. Instead, maintaining a long-term perspective is key.
Looking ahead to the upcoming week, the focal point will be the release of the minutes from the most recent Federal Reserve monetary policy meeting held on May 4, 2022. This release is particularly significant given the clear indications of slowing economic growth.