This week in the markets: rates to stay higher for longer?

Markets remained stable on Monday despite investors recalibrating their expectations for US rate cuts following strong jobs data on Friday and ahead of new inflation numbers this week.

Shares in the UK and Europe were steady, with the FTSE 100 up 0.2% and the Eurostoxx 50 up 0.5% by lunchtime on Monday. Futures markets saw the S&P 500 and Nasdaq opening level later on. That follows a dip in the US market last Thursday as investors began to worry that interest rates may not come through as expected this year.

That fear was underlined by stronger-than-expected jobs data on Friday which provided yet more proof of the US economy’s good health. Those numbers also suggested inflationary pressures persisting more than is currently priced into markets. The official US inflation number due on Wednesday will give even more insight.

Markets currently expect there to be three rate cuts by the Federal Reserve this year. Any delay to that timetable will probably be received badly by markets because it would harm the prospects of the largest companies which are made to look better value if rates and inflation are lower.

This is the dilemma facing investors right now. They are willing lower interest rates because this would likely to have a positive effect on the headline level of markets, but they would also quite like growth in the economy in order to broaden out the bounce in markets beyond those giant tech companies.

It may turn out that you can have an economic recovery but rates that are higher for longer, or you can have weak growth and lower rates - but you can’t have both.

In Europe, the European Central Bank will meet on Thursday to set rates in the eurozone. Economists expects them to be held although inflation in Europe is dropping faster than in other regions, meaning eurozone rates could go down before those in the US or the UK.

The shifting view on rates has also been reflected in the price of gold. The precious metal is regarded as a hedge against inflation in the long term and prices rose to £2,350 at one point on Monday - a new record - before falling back to around £2,340.

Elsewhere in commodities oil prices fell around 1% after small signs of de-escalation in the Israel-Hamas war. Israel has withdrawn some troops from Gaza and a new round of ceasefire talks have begun in Cairo. Brent Crude was trading at $90 a barrel on Monday.

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