The FTSE 250 is down 2.5% on Monday, compounding losses from Thursday and Friday. The fall has wiped out gains made in May.
The FTSE 250 is an index consisting of the 101st to the 350th largest companies listed on the London Stock Exchange. The index’s value is calculated in real time, while stocks are promoted and demoted quarterly depending on fluctuations in their value.
So, why is the FTSE falling?
US inflation data
Global markets experienced a selloff towards the end of last week amid disappointing data from the US.
US Consumer Price Index numbers, published on Friday, showed inflation jumping to a 41-year high. In May, inflation rose by 8.6% versus forecasts of 8.3%. Many were hoping that US inflation had peaked, but this isn’t the case.
Higher inflation stoked fears that the US Federal Reserve will need to aggressively raise interest rates, which in turn may slow economic growth and increases the chances of a recession.
Markets have moved accordingly, pricing in a 175 basis points interest rate increase by September. Some analysts are expecting a 75 basis points hike this month. It would be the first time the Fed has hiked by three quarters of a percent since 1994.
US stocks fell on Thursday ahead of the CPI data and fell further on Friday after the bombshell announcement. US stocks continued downwards after the FTSE closed for the weekend. Global markets have followed the US downwards.
Poor economic data
But sadly, US inflation data isn’t the only bad news.
The British economy shrank by 0.3% in April, according to official figures released by the CBI on Monday. It had been expected that the UK’s economy would grow by 0.1% in April. The shock also pushed the market downwards.
The CBI downgraded its growth outlook to 3.7% for 2022, from 5.1% previously. It also adjusted its growth forecasts for 2023 to just 1%, down from 3%.
This has compounded negative economic forecasts from the continent. On Friday, the Bundesbank axed growth targets for the next two years. It said that Germany’s economy will likely grow by 1.9% in 2022, down from the 4.2% it had predicted in December.
What to look out for?
This isn’t the end of the story and there’s a few thing I’m keeping an eye on this week.
Both the Bank of England and the US Fed are expected to hike rates this week, and they could be considerable increases.
Central banks will want to show that they are serious about controlling inflation. Developed economies tend to target around 2% inflation, and at the moment, we’re seeing rates four and five times that.
While rate hikes may sound bad right now, in the long run, it’s important that central banks remain credible. Long-term growth is partially dependent on maintaining a safe and attractive economic environment.