Market Update

As evident from the provided table, global equity markets endured another challenging week following a series of central bank policy meetings.
Before we delve into these policy meetings, we'd like to emphasize the importance of not getting caught up in the day-to-day market noise. We acknowledge that market volatility and the economic environment can be unsettling, but making impulsive decisions in such times can be counterproductive. It is crucial to maintain a long-term perspective because markets often tend to react excessively to short-term negativity and downside risks.
At the latest US central bank policy meeting, it appears that Fed policymakers opted to prioritize headline inflation over core inflation, which excludes volatile items like food and energy. They made the decision to raise US interest rates by 0.75%, a move that appeared unlikely just a couple of weeks ago. While this decision might seem sensible, it's worth noting that the surge in food and energy prices, often referred to as 'Putinflation' due to its association with the war in Ukraine, is beyond the control of the Fed through interest rate adjustments. However, the Fed's aim is to prevent long-term inflation expectations from becoming unhinged, especially considering the headlines in the US reporting gasoline prices exceeding $5 per gallon, while in the UK, the cost of filling up a typical car is nearing £100 as the price approaches £2 per litre.
Furthermore, Fed Chair Jay Powell mentioned that the long-term neutral interest rate remains around 2%, suggesting that this week's aggressive rate hike was intended to surprise and impress the market. This approach could position the Fed to potentially slow or halt interest rate increases earlier than previously anticipated, particularly as recent US economic data indicates that past interest rate hikes are already affecting demand. For instance, May saw a 0.3% decline in retail sales, a 14.4% drop in housing starts, and the Philadelphia Fed Business Outlook Survey revealed not only a contraction in current conditions but also expectations for the next six months at levels consistent with previous recessions.
Not surprisingly, shares of consumer discretionary companies, such as retailers and travel and leisure businesses, faced significant declines this week. For instance, Carnival Corporation, a US cruise ship operator with shares listed on the UK equity market, witnessed a 17.89% drop this week, returning its shares to the levels seen at the onset of the coronavirus outbreak and lockdown. Similarly, Caesars Entertainment, a hotel and casino operator, saw its shares fall nearly 13% this week, marking a 68.5% decline since its peak last October. Wayfair, an online furniture retailer, experienced a nearly 90% drop from its peak last year.
In the UK, despite recent GDP data indicating a shrinking economy, Bank of England policymakers focused on the rising headline CPI inflation rate and raised interest rates by an additional 0.25%. Notably, three out of nine policymakers voted for a 0.5% increase, suggesting that UK interest rates may rise again at the next meeting on August 4, 2022.
In Japan, the Bank of Japan (BoJ) opted to keep its policies unchanged. This decision might appear at odds with other central banks, but it reflects Japan's unique economic conditions, characterized by a weak economy and a labor market that lacks the tightness needed to stimulate wage growth.
Looking ahead to the coming week, please note that US markets will be closed on Monday, June 20, 2022, in observance of Juneteenth. In terms of data releases, we can expect UK and Japanese CPI inflation figures, UK retail sales data, US mortgage applications, Eurozone consumer confidence data, and Purchasing Managers' Index (PMI) data from the US, UK, Eurozone, and Japan. Additionally, the University of Michigan Consumer Sentiment report will be published.