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Key takeaways

A spike upwards in geopolitical tensions in the Middle East caught the world’s attention last week. In financial markets, heads were also turned by news of higher than expected US inflation.

US inflation higher than predicted, but still well below its peaks
Pricing pressures were stronger than expected in the US in March, with official data showing a 3.5% increase in inflation. This figure was driven by high prices in the services sector, with the costs of shelter (housing) and insurance among the key contributing factors. However, it’s important to remember that while a reading of 3.5% was above most people’s predictions for inflation in March, in relatively recent history US inflation reached a little over 9%.

Investors rethink the timing of US interest rate cuts
In the wake of these inflation updates, financial markets have been thinking again about the likely course for US interest rates from here. Investors are now sending signals that they expect the first interest rate cuts in the US to take place in September; as a reminder, markets had previously anticipated rate cuts in the spring or early summer, but now expect the US central bank to hold rates at a higher level for longer, in an effort to bring inflation lower.

No changes to interest rates in Europe
The European Central Bank held interest rates steady at their all-time high of 4%. The central bank’s governing council indicated that rates would remain at this level until there were clear signs that European inflation had stabilised. President Lagarde noted that a minority of the council were already calling for rate cuts.

Anaemic but positive economic growth in the UK
According to the latest update from the Office for National Statistics, the UK economy grew by 0.1% in February. This was the second consecutive month of positive economic growth, though at these low levels it’s fair to say that the news does not signal a period of stellar economic expansion.

A new, unwelcome chapter in Middle Eastern tensions
In the Middle East, geopolitical tensions jumped higher when Iranian forces seized an Israel-linked cargo ship with 25 crew members on board. Iran then took unprecedented direct action on Israel, including cruise missiles and drone strikes. Iran has accused Israel of carrying out a deadly attack on the Iranian consulate in Syria on 1 April (Israel has neither confirmed nor denied responsibility for this strike). Clearly, any escalation in military conflict is extremely alarming from both a humanitarian and global security perspective, but at the moment – like the rest of the world – we must wait to discover how the situation unfolds over the coming days.

Weekly market moves

  • Financial markets had a challenging week, with both stock and bond markets generally falling.

  • A stronger US dollar largely offset US stock market losses for UK investors, as financial returns were flattered by being translated into the weaker UK currency.

  • Having risen in response to heightened geopolitical risks, the price of oil edged lower over the week. Sticking with commodity markets, gold continued its recent run of strong performance.

What to look out for this week

  • Events in the Middle East are likely to hold media headlines this week, and financial markets could be preoccupied by the potential knock-on effects of these events.

  • A spate of economic data is also due for release, including inflation news in the UK, economic growth data for China, and a retail sales update in the US.

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