Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest

INVESTOR sentiment has been hit by worse than expected inflation and growth numbers either side of the weekend. The data has set up a nervous week with the focus on three key central bank meetings. The S&P 500 fell 2.7% on Friday. Asia and Europe caught up today.

Inflation hopes dashed

Expectations that price rises in the US would start to moderate were blown out of the water by a worse than feared CPI reading just ahead of the weekend. A 1% month on month rise in prices, on the back of rising food and energy costs, was way ahead of April’s 0.3% reading and worse too than economists’ forecast of 0.7%. The year-on-year rate hit 8.6%.

That has raised fears that the Fed will raise interest rates harder and faster, to a peak of 3.5% in the current cycle. That’s bad news for stock market investors because it lowers the present-day value of future profits and reduces the fair value for shares. Analysts think that might be around 3,600 for the S&P 500 compared with the current 3,900.

Bond investors are feeling the pain too, with the yield on the shorter-dated bonds that suffer most from higher rates, rising above 3%, the highest since 2008. Higher yields equate to lower prices for fixed-income investors.

Growth on the back foot too

On this side of the pond, the bad news came after the weekend in the form of worse GDP data than forecast. The UK economy shrank by 0.3% in April, compared with an expected 0.1% rise. The finger was pointed at the end of Track and Trace, itself a concern as it suggests that the economy has only been held up by unproductive Covid-related activity.

The UK stock market is relatively immune to domestic weakness because of the importance of global sectors like commodities and oil & gas. So, the main impact of lower growth is showing up in a weak pound, which has fallen to $1.22, down from more than $1.40 a year ago.

All eyes on central banks

Against a toxic two-way pull of rising prices and sluggish growth, the main focus for investors this week will be rate-setting decisions around the world.

In the US, the question is not whether interest rates will rise but just how many half percentage point hikes there will be this year. Key to that will be the dot plots chart of individual rate-setters’ forecasts.

Here in the UK, the pace of rate rises is likely to be slower and the end point lower than in the US, but the challenge is arguably greater as policy makers get to grips with a re-run of 1970s-style stagflation.

In Japan, the focus is different again. There, the central bank is determined to keep rates on the floor to promote growth. The downside of that policy has been a tumbling currency, with the yen standing at a 24-year low.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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