FOMC meeting dominates, with Powell tone key to market expectations

The FTSE 100 has enjoyed a largely upbeat start to the day, with concerns evident throughout US indices failing to transmit to the widely perceived undervalued UK index. On a day that sees much of Europe enjoying labour day holidays, the FTSE has single handedly pushed a more constructive tone for the region. Yesterday had seen sharp declines for both European and US indices, with the UK once again proving its worth as a haven given its relative stability. After years of underperformance, UK investors are enjoying this rare period of outperformance as the index continues to appear relatively unconcerned about the events on the other side of the Atlantic.

Today sees the Federal Reserve step up to the plate once again, with Jerome Powell holding the markets in his hands. Recent concerns around a resurgence in inflation pressures have pushed back the expected rate cuts that had until recently been scheduled to commence next month. The market pricing for a June rate cut has shifted from 56% to just 6% in the past month, but even more incredibly we have seen it pushed all the way back to December, bypassing three meetings in the process. With the Fed’s March dot plot having laid out plans to cut three times this year, it is evident that the recent inflationary surge has similarly taken Powell and his colleagues off-guard. Today is the opportunity for him to set new expectations, and there is understandable concern that this meeting will be dominated by a more hawkish tone. Given the dramatic shift in expectations by the markets, bulls will hope that Powell could provide a glimmer of hope that things may not be as bad as markets are portraying.

The UK housing market has taken a negative turn of late, as resurgent inflation concerns put upward pressure on rates. The anticipated June rate cut from the Fed has now been pushed back to August, and banks are clearly feeling less need to compete over mortgage rates to draw in prospective buyers. The Nationwide HPI reading of -0.4% did highlight the continued caution within UK house buyers for now, with buyers remaining in the driving seat. Nonetheless, with yesterday’s BoE report highlighting the fact that March saw the highest number of net approvals since September 2022, we are gradually seeing the housing market awaken from its slumber as we approach the first rate cut.