The FTSE 100 was under pressure on Thursday as interest rate concerns returned following the release of Federal Reserve minutes, and a warning from economists UK interest rates could rise as high as 7%.
The Federal Reserve minutes threw cold water on the notion they were near the end of their hiking cycle and suggested they could hike rates twice more this year, albeit in a more sporadic manner than over the past 18 months.
“You don’t necessarily think of meeting minutes, often associated with the likes of parish council meetings or the AGM of the local bird spotting club, having a big impact but the record of the Federal Reserve’s latest rate-setting summit has put stocks firmly on the back foot,” says AJ Bell investment director Russ Mould.
“They suggest the Fed remains committed to further rate hikes as it looks to get inflation under control. These dashed hopes, lifted by data showing easing inflation across the Atlantic last week, that the US might be pretty much at the end of its rate-hiking cycle.”
UK interest rates
UK Investors were also dealing with the prospect of UK interest rates at 7% after economists at JP Morgan suggested UK rates could rise as high as 7% in a worst-case scenario.
Both markets and economists have steadily increased their UK interest rate terminal rates forecasts over the past month. Interest rate futures markets are now pricing UK rates to rise to 6.5% by March 2024.
Stubbornly high inflation will warrant additional rate hikes by the Bank of England, which risks tipping the UK into a recession.
Yesterday, the UK government sold £4bn gilts with a maturity in October 2025 with a yield of 5.668% – the highest yield of bonds sold by the UK since 2007.
The UK bond yield curve is now deeply inverted. This will concern investors and UK households as an inverted yield curve is a statistically significant indicator of recession.
Both the IMF and Bank of England have rolled back their predictions of a UK recession; markets will highly anticipate their next amendments to their UK growth forecasts. It is a difficult job forecasting growth rates but these major institutions will not want to
FTSE 100 movers
The FTSE 100 was down 1.35% at the time of writing on Thursday, with 98 of the 100 constituents trading in negative territory. The index has now erased all of 2023’s gains.
As one would expect in a sell-off driven by UK interest rate concerns, UK housebuilders saw heavy selling, with Persimmon breaching the 1,000p mark for the first time since 2013.
Retailers Next and Fraser’s Group were under pressure, dropping over 3%. JD Sports was down 2.6%.
Flutter was down 3.9% and the FTSE 100 top faller.
Concerns about the health of the Chinese economy were again evident in miners as Glencore and Antofagasta fell more than 3%.