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Sticky US inflation: Three straight months of it being higher than expected.

A third straight month of US Consumer Price Index (CPI) inflation being stronger than expected led to a global stock index fall -1.5% from last week’s all-time high. The US inflation numbers for March showed CPI rising at 3.5%, up from 3.2% YoY in February. CPI plays an important factor in the US Federal Bank’s interest rate decisions as it tries to lower inflation toward its 2% target.

Number of expected cuts falling: Six expected rates cuts predicted in January, fall to one or two now.

Given the inflation rise and a strong US jobs market, evidence points to continued strong demand in the US economy and therefore interest rates may need to stay higher for longer. So instead of six expected 25 basis point reductions in interest rates (predicted in January), there may only be one or two now.

Diverging interest rate prospects?  UK and Eurozone see bigger impact of higher interest rates.

As expected, the European Central Bank (ECB) held interest rates. However, it signalled it may soon start to cut them, even as US data is less supportive of cuts. A strong US economy with sticky inflation contrasts to other developed countries. For example, the UK, Eurozone and Canada are finding higher interest rates are affecting economic output. The impact of this is two-fold: a stronger US Dollar vs other currencies and differences in government borrowing rates.  The chart below shows the difference between the yield on two-year US government bonds and German two-year government bonds has moved wider of late. The difference or ‘spread’ is a sign markets believe the European Central Bank will need to cut rates by more than the US.

What this means for you

The evidence that the US may be taking a different path to interest rate cuts than other key economies underscores the importance of having global diversification across different bond markets. So, maintaining a well-diversified, long term investment approach rather than reacting to market swings remains a key message. By staying committed to carefully considered plans, investors can navigate through periods of volatility and uncertainty.

These views expressed by M&G Wealth are subject to change without notice and we can’t accept any liability for any loss arising directly or indirectly from any use of it. This is for your information only. It is not a recommendation or advice if you’re unsure about anything please your financial adviser.

16 April 2024

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