Emma Wall, Chief Investment Strategist, Hargreaves Lansdown: “UK inflation increased to 3.3% as the impact of the Middle East conflict flowed through to fuel prices. This increased from 3% the previous month and was in line with analyst expectations.
While the increase in prices will be felt keenly at the petrol pump, it is highly unlikely a single inflation print will be enough to sway policy makers into moving the Bank of England base rate next week – though market watchers will be eagle eyed to see the vote split, as members of the MPC will likely be divided.
Inflation is likely to remain elevated in April too, and markets are now pricing in one rate rise later this year. But our house view is that rates are held through the conflict – returning to the expected rate cutting cycle later than forecast just a couple of months ago, but on path to neutral next year.
The pound didn’t move on the news, such was the increase expected, and it is unlikely to move UK markets when London opens this morning. But that doesn’t mean increased inflation will be ignored forever. Warnings in the recent days have come from the International Monetary Fund and the EY Item Club – specifically calling out the UK’s specific vulnerability to the impact of the war due to our reliance on Middle Eastern energy, global supply chains – and starting point of already anaemic growth compared to other G7 nations.
These were worst case scenarios – modelling a long and protracted war, which yesterday’s ceasefire extension suggests the US has little appetite for. We think that while the conflict is likely to impact UK – and indeed global – growth for the next couple of months, it is unlikely to cause recession on either side of the Pond.
For a man elected on ending forever wars, this is a deeply unpopular conflict with his base, and as he approaches Mid Term elections with American’s being pinched by higher petrol prices and higher bond yields, Trump will be keen to find resolution.
Overnight, the US President announced that he would be extending the ceasefire with Iran, which was due to conclude yesterday. The news sent US futures higher across both the S&P 500 and the NASDAQ tech index, and the oil price fell slightly too. But the ceasefire extension last night has not done enough to entirely quell markets this morning, with mixed reaction on the board. Markets will be balancing the positive news of a continued ceasefire with the other news flow – peace talks are not progressing, and the Strait of Hormuz remains closed. Bloomberg calculates that 100 fewer ships a day are getting through the Strait, compared to pre-war volumes.
Futures this morning suggests the FTSE 100 will open modestly down, with European markets and the US in the green.”
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