The major event this week was the meeting of the Federal Open Market Committee (FOMC), which sets interest rates in the US. The FOMC has been gradually raising interest rates for over a year, and was widely expected to leave them unchanged at this meeting, which it did. The question remains, however, how many more interest rate rises there will be in the rest of the year – markets are anticipating another two or three. Inflation in the US is creeping up, wages are on the rise, and there are fears that this may lead the FOMC to raise rates more rapidly than anticipated. However, the statement made by the FOMC was fairly dovish and suggested that the FOMC would not necessarily hike rates further if inflation overshoots its 2% target.
We are now into “earnings season”, with a large number of US companies reporting their first quarter earnings. In general, earnings have been positive with many companies reporting strong earnings growth, helped by Donald Trump’s corporate tax cuts. So far, this has not fed through to share prices – the S&P 500 Index in the US has barely budged since the start of April. What this means, however, is that the US Stock Market appears more fairly valued in terms of its price-earnings ratio. Prices now sit at around 16 times next year’s expected earnings, compared with 18.6 times when the market sat at its all-time high in January.
UK economic data continues to be fairly weak. Consumer Confidence, Consumer Credit Growth and various Purchasing Managers Indices fell last month. Although the FTSE 100 held on to the gains made in April, Sterling continued to weaken against the Dollar, falling to $1.355 to the Pound at the time of writing (a little over two weeks ago it stood at $1.43). All eyes will be on the Bank of England’s interest rate decision next week. Until recently, the Bank was expected to increase the base rate this month. However, the unexpected fall in the inflation rate last month and the weakening economic data are putting this in doubt.
As well as the prospects for interest rates, Sterling may also be sensitive to what is happening in the Brexit negotiations. These are looking increasingly intractable, with the EU making ever more demands for control over the UK post-Brexit. This increases the likelihood of either a “Hard Brexit” or caving in to the EU demands. Both of these would be unacceptable to at least half the population. Theresa May’s defeat in the House of Lords has weakened her negotiating position. When the results of this week’s Local Elections have been digested, we will have more of a clue whether we have reached “Peak Corbyn”, which would lend greater public support to the Government’s attempts to find a sensible middle solution.