Join the dots

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This week’s US Consumer and Producer prices provided a welcome boost to the hope that inflation could slowly return to the Federal Reserve’s 2% target, as both came in below the market expectations. The monthly Fed meeting produced little surprises, which in itself was no surprise, as rates were left unchanged, and Jerome Powell indicated the Committee were inclined to cut just once at some point this year. The “dot plot”, which is a sort of picturesque way of expressing the Federal Reserve’s expected path of rates based on each Fed official’s projection for the central bank’s key short-term interest rate, predicts that US interest rates will fall to 5% by year-end, 4% by end 2025, and 3% by end 2026. The key takeaway is that US interest rates are on a downward path for the coming years, assuming all things are equal, and that is the case for most of the developed world. Next week, the Bank of England meet, and they likely deliver a similar message. Rates will start to come down at some point in the coming months; the trajectory is a downward path, but there is no rush.

The fallout in Europe continued after the European elections, as spreads between German and French bond yields continued to widen. UK asset prices have remained fairly stable into the coming election, but recent results from other parts of the world, including Europe and South America, remind us that these times of political uncertainty can lead to asset price volatility. The reform party, according to the polls at least, has overtaken the Conservatives. When it comes to putting the X down on polling day, we shall see how strong the conviction lies.

We now enter the summer months, and holidays are on the agenda. This is often a time of market volatility, as liquidity is poor and inventory is low.