Please see below this yesterday’s global market round-up from Brewin Dolphin, which was received late yesterday afternoon – 09/04/2024:
Please continue to check our blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.
Carl Mitchell – DipPFS
Independent Financial Adviser
10/04/2024
Please see below article received from Brooks Macdonald this morning, which provides a global market update for your perusal.
What has happened
Government bond pricing in both the US and Europe fell back (with bond yields rising) on Monday, as markets moved to cut hopes for the number of interest rate cuts this year. For context, at the start of the year, markets were pricing in more than six quarter-percentage-point cuts this year from the US Federal Reserve (Fed) – on Monday, this number was standing at less than three. Adding to the latest shift in view, US bank JPMorgan CEO Jamie Dimon said in his annual letter to shareholders, that the US economy “is being fuelled by large amounts of government deficit spending and past stimulus … this may lead to stickier inflation and higher rates than markets expect.” Staying with inflation, ahead of tomorrow’s US consumer inflation data, yesterday we got the latest New York Fed Survey of Consumer Expectations – to be fair it showed a bit of a mixed picture on inflation expectations, though the good news is that 5-year expectations fell by -0.3% points on the previous month, down to +2.6%,
Markets now fully pricing in just two rate cuts from the Fed
Market confidence around the number of interest rate cuts out of the Fed looked to wane further on Monday. Verus the Fed’s ‘dot plot’ of its members which showed last month a median expectation of three quarter-percentage-point cuts this year, markets on Monday moved to price in 61.5 basis points (bps) of cuts by the Fed’s December 2024 meeting, a fall of -3.3bps on the previous day – it implies that only two 0.25% rate cuts are currently being fully discounted.
Middle East tensions take a breather, but China fills the geopolitical gap
Oil prices saw a modest dip down from a five-month high on Monday after Israel said it would remove some troops from Gaza, helping to cool some of the previous week’s geopolitics-led gains. Instead, China looked to be filling the geopolitical gap on Monday- it emerged that US President Biden is expected to warn China about its increasingly aggressive activity in the South China Seas later this week during planned summits with Japan and the Philippines. According to newswires yesterday, a senior US official was quoted as saying that “China is underestimating the potential for escalation … China needs to examine its tactics or risk some serious blowback.”
What does Brooks Macdonald think
There is debate currently as to whether we might see some interest rate policy divergence between the Fed and the European Central Bank (ECB). In the case of the Fed, the probability of an interest rate cut by the US central bank’s June meeting is down to just 52% currently (the lowest since October last year), and the total number of Fed cuts priced by the December 2024 meeting is now just 61.5bps. Contrast that with the ECB where the probably of a cut by June is higher at 91% currently, and the total number of cuts by December 2024 is also higher at 80.5bps currently. All in all, it points to a contrast in the differing economic backdrops with the US showing relatively stronger economic growth currently, but with it, the risk of relatively stickier inflation as well.
Please check in with us again soon for further relevant content and market news.
Chloe
09/04/2024
Please see below article received from Brooks Macdonald this morning, which provides a global market update for your perusal.
What has happened
Equity markets were initially building for a small up-day yesterday, but after Europe closed, in later US hours trading things took a sharp turn down. The US S&P 500 equity index fell by over 2% intraday, ending the session down – 1.23%. The main catalyst for the fall was rising tensions in the Middle East, which has pushed oil prices higher, and in turn adding to worries around the risks for resurgent inflationary pressures. In better economic news, yesterday saw the Euro Area composite PMI (Purchasing Managers Index) which was up to 50.3 for March, versus February’s 49.2, and marking the first time it has been in expansionary territory in ten months. Later today, markets will be focused on the US labour market, with US non-farm payroll numbers for March due – payrolls are seen increasing by at least 200,000 for a fourth straight month. Average hourly earnings are projected to climb 4.1% from the same month last year, which would be the smallest annual advance since mid-2021.
Oil prices hit $91 a barrel
Brent crude oil prices have made new 5-month highs in early trading this morning, building on yesterday’s gains, and briefly trading above $91 per barrel. The latest rise follows mounting geopolitical tensions around the Middle East – Israel has increased preparations for potential retaliation by Tehran after Monday’s strike on an Iranian diplomatic compound in Syria. Meanwhile, US President Joe Biden told Israeli Prime Minister Benjamin Netanyahu this week that US support for the war in Gaza depends on new steps to protect civilians. Separately, Netanyahu said at his country’s security cabinet meeting that Israel will operate against Iran and its proxies and will hurt those who seek to harm it. Oil has rallied this year on the back of combination of tightening global supplies, better than expected demand, and geopolitical risks in both Russia-Ukraine and the Middle East. Finally, regarding Russia, a NATO official said yesterday that Ukrainian drone strikes on Russian refineries may have disrupted more than 15% of Russian capacity, potentially adding to supply constraints.
US dollar strength is not good news for some
This year has seen an arguably already strong dollar move stronger, boosted as markets have in recent months reduced their expectations for the scale of likely Fed rate cuts later this year. As a result, a resurgent US dollar is causing problems for central bankers and governments around the world, forcing them into action to relieve the pressure on their own currencies. By way of example, Japan’s Finance Minister Shun’ichi Suzuki last week warned of “bold measures” to bolster the yen, while Turkey unexpectedly hiked interest rates last month, and elsewhere, Swedish officials have recently said a weaker krona could delay its first move to ease interest rates.
What does Brooks Macdonald think
Exchange rates matter because a depreciating currency can risk increasing the cost of imported goods for the country in question, leading to a drive-up in inflation. Meanwhile, there’s also an increased risk that investment flows could also move away from a country with a weakening currency in search of higher expected returns elsewhere. This so-called ‘capital flight’, which can harm domestic investment and growth, can be a risk for some emerging market countries in particular given their often relative economic reliance on investment inflows to start with.
Please check in again with us soon for further relevant content and market news.
Chloe
05/04/2024
Please see below an article from EPIC Partners providing their daily round-up on markets, which was received late this morning (26/03/2024):
At the China Development Forum, the IMF’s Managing Director Kristalina Georgieva said she believes the world’s second-largest economy faces “a fork in the road”, whether to stick to its tried and tested policies that have worked in the past to a lesser or greater degree, or push for high-quality growth.
Georgieva added that: “With a comprehensive package of pro-market reforms, China could grow considerably faster than a status quo scenario”. The IMF believe these pro-market reforms could unleash a 20% expansion of the real economy over the next 15 years, which in today’s terms would equate to adding USD3.5tn to the Chinese economy. The IMF also upgraded its estimate that China’s economy will grow 4.6% in 2024, 0.4% point higher than its last forecast in October, and 0.4% below China’s own forecast.
However, Georgieva also warned that China had pressing near-term challenges, including transitioning the property sector on to a more sustainable footing and reducing local government debt. In order for this to happen China needs to take “decisive steps” to complete unfinished housing stranded by bankrupt developers and to reduce risks from local government debt she said. In doing so, China could “accelerate the solution to the current property sector problems and lift up consumer and investor confidence”. She went on to say that: “A key feature of high-quality growth will need to be higher reliance on domestic consumption”, adding that this “depends on boosting the spending power of individuals and families”.
Finally, as we approach Easter, the price of your Easter eggs next year might be a lot higher than the ones you bought this year. Cocoa futures are up 50% this month alone and have more than doubled since the turn of the year. The combination of aging trees, diseases, bad weather and demand has combined to create the largest shortfall seen in the cocoa market in more than sixty years.
On Monday, cocoa futures closed at nearly $10,000 a ton, up 8% from Friday’s close, up 250% in the last few months, making it more expensive than copper.
Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.
Carl Mitchell – DipPFS
Independent Financial Adviser
26/03/2024
Please see below article received from Tatton this morning, which provides a positive update on global markets.
Overview: Stick to the Plan
Brighter days for markets; returns were strong across the board last week, thanks to central bank messaging.
The Bank of England (BoE) “has done its job” according to Governor Bailey, and “we are not seeing a lot of sticky persistence” in inflation. Markets are pricing cuts in July, with rates settling at 3.5% in 24 months. If the BoE moves rates in line with economic activity, though, it would mean rates between 3% and 3.5% in around 18 months on our calculations.
The hawkish Monetary Policy Committee members are less hawkish now that inflationary behaviour has dissipated. Recent data shows more money is being spent, but the rise is slow. It vindicates the BoE’s wait-and-see approach. Comments suggest MPC members now fear low growth more than inflation, which could mean a rate cut in May if April inflation is lower than 2%, as expected.
The ECB could join in, after telling us that “rate cuts are coming”. Manufacturing confidence is low, and Switzerland cut rates during the week, supporting the notion of an ECB cut. The Bank of Japan actually raised rates, but markets acted like they cut (see article below). There was weakness in China – the heart of global disinflation – which led to falling Chinese bond yields and possible policy giveaways from Beijing.
The Federal Reserve said it was still expecting to cut rates, despite US inflation picking up. There is a growing confidence that the US economy is balanced, despite continued economic strength. But strength is a complication for chairman Powell’s plan. The Fed expects 2.1% real growth and 2.4% inflation in 2024, but things will have to slow from here to achieve that – and current activity is rising.
Central banks feel vindicated in sticking to their plans: inflation is down and activity is not too bad. For the Fed specifically, this might be overconfidence, but that will be good for company profits in the short-term. Our only worry is that, if inflation does move higher, the nice rate cut narrative might shift suddenly.
Japan’s rates are go – and markets up with them
The Bank of Japan (BoJ) raised interest rates for the first time in 17 years last week. The hike, from -0.1% to a range between 0% and +0.1% might seem tiny, but it is big and symbolic for the Japanese. The BoJ becomes the last central bank to end negative rates, curtailing the era of no payouts for Japanese depositors.
Markets reacted unintuitively. The value of the yen fell sharply, the currency now at ¥151 on the dollar. Bond yields also fell, with Japanese 10-year yields now well below the 1% peak from October. Equities rallied too, and the Nikkei 225 up over 20% year-to-date. All of these are the reverse of what you would expect when Japan’s monetary policy is finally tightening.
Markets acted like the BoJ cut rates instead of hiked them, because the decision came with dovish signals. Japanese inflation is now barely above the bank’s 2% target and trending down, so BoJ governor Kazuo Ueda has said borrowing costs will not go up sharply. Market positivity – which pushed the Nikkei past its 1989 asset bubble peak only last month – should help stave off a return to deflation.
Japan’s goods, services and labour are extremely competitive after decades of stagnation. There have been corporate structural changes in the last decade which will help take advantage of that too – resulting in the biggest wage increase since 1992. Structural changes, the third arrow of the late Prime Minister Shinzo Abe’s “Abenomics”, have finally hit home. This will likely mean stronger inflation and nominal growth, even if still low compared to the world.
Thankfully, the BoJ is keeping rates low relative to the expected growth, with real (inflation-adjusted) rates still negative. It refuses to do much in the face of inflation, and Japan’s economy should benefit.
Neom and the Saudi Line
Saudi Arabia wants to create the future of sustainable living in Neom, a futuristic megacity featuring “The Line”, a linear ‘smart city’ with no cars or fossil fuels. There is understandable cynicism in the West, considering the country is the world’s largest oil exporter and currently imports 80% of its food. Critics have called it “greenwashing” or purely PR, similar to Saudis’ extensive sports investments.
But at a top estimated cost of $1 trillion ($500bn on the low end), Neom would be by far the most expensive publicity stunt in history. There are more cost effective ways of improving image that Riyadh is already pursuing – like forcing international companies to set up Saudi headquarters or joint ventures in exchange for government deals. Many big names have already done so, and more are sure to follow.
The huge sums and coordinated policies tell us Crown Prince Mohammed bin Salman is serious about diversifying the Kingdom away from oil exports. It obviously has an interest in promoting oil, but the nation’s long-term interests are to no longer rely on the industry.
Part of the ‘Saudi Vision 2030’ campaign is about aligning Saudi Arabia – which has a higher GDP per capita than several European nations – with global economic and financial institutions. Its links to the global economy are currently one-track, and there are opportunities in diversifying them.
That requires upfront capital, and Riyadh is certainly willing to spend it. Not only might the Kingdom’s massive reserves be put to work for global companies, but the domestic stock market – including the world’s most profitable company Saudi Aramco – might be opened up too. It means a reallocation of capital towards newer, hopefully productive, areas. Opportunities are there, but risks of congestion and misallocation are too.
Please check in with us again soon for further relevant content and market news.
Chloe
25/03/2024
Please see below article received from Brooks Macdonald this morning, which provides a global economic and market update.
What has happened
Over the past week, the financial markets grappled with persistent inflationary pressures. Key economic indicators, such as the US Consumer Price Index (CPI) and Producer Price Index (PPI), exceeded forecasts, signalling more persistent inflation. Concurrently, oil prices experienced a significant uptick, with Brent crude reaching $85 per barrel, a high not seen since October. These developments prompted a reassessment of the Federal Reserve’s potential interest rate trajectory. Market expectations for a rate reduction by the Fed shifted, with futures markets now indicating approximately a 60% likelihood of a cut by June, a stark contrast to the nearly certain expectation of a cut two weeks prior. The prospect of fewer rate cuts led to a rise in global yields and a slight downturn in equities. The S&P 500 fell 0.13%, and the small-cap Russell 2000 index was particularly hard hit, falling by 2.08% over the week .
Important decision from the Bank of Japan tomorrow
The Bank of Japan (BoJ) is poised to terminate its negative interest rate policy (NIRP), which would represent its first rate hike since February 2007. The BoJ is reportedly considering an increase in the short-term interest rate from the current -0.1% by over 10 basis points to a range between 0% and 0.1%. This move is based on the assessment that economic conditions are now favourable for achieving a stable 2% inflation rate. In addition to ending NIRP, the BoJ is also expected to discontinue its yield curve control (YCC) policy and halt new purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), although it may maintain some level of Japanese government bond (JGB) purchases to manage yield volatility post-policy change.
What does Brooks Macdonald think
The upcoming week could be pivotal for the financial markets, as we will see multiple central bank decision. The most important one is Bank of Japan, which is likely to increase rates to 0% tomorrow, marking an end to the era of global negative interest rates. This event may overshadow the Federal Reserve meeting on Wednesday, where no interest rate adjustment is expected but it should provide insights into the Fed’s stance on inflation. Additionally, the Bank of England (BoE) is scheduled to hold its policy meeting on Thursday, rounding out a significant week for central banks worldwide.
Please check in again with us soon for further relevant content and market news.
Chloe
18/03/2024
Please see below article received from M&G Wealth Investments yesterday afternoon, which anticipates the markets’ reaction to the result of the November 2024 US presidential election.
2024 has a busy election calendar and governments may be more inclined to reduce taxes and spend more, in an effort to win over voters.
The November 2024 US elections are still a long way off but with the US Presidential nominees now set, we’re starting to think about the future outcomes and market scenarios. Given the sharp policy differences between the two political parties the election outcome could have profound political, economic and market implications – but this is also dependent on the scale of the candidate’s victory. These are our thoughts and what we’re watching:
2025: Expect a deluge of legislation
In the past decade, presidents have moved to enact their flagship policies early in their term. This is because there’s a risk of the House and Senate changing in the ‘mid-term’ elections two years later. In addition, political parties tend to stop working to pass legislation or approve new appointments in the run up to elections. For example, Donald Trump’s key policy of tax cuts was delivered in 2017 and reduced the headline rate of corporate taxes from 35% to 21%. President Joseph Biden’s Infrastructure legislation came in 2021 and the Inflation Reduction Act in 2022. These are examples of key policies that have influenced the US economy and markets.
What does this mean? There’s a narrow window for legislation to be passed in the US. Regardless of who wins, we expect a deluge of new legislation in 2025 and we would expect both candidates to continue spending and borrowing.
If Biden’s Back
We’d expect a Biden victory to reinforce the existing agenda of The American Jobs Plan – investment in infrastructure, transportation, and manufacturing, alongside a focus on building alliances abroad.
Regulation of technology companies and artificial intelligence could be a new area of focus. So far, the European Union has been taking more significant actions to regulate technology companies than the US. We could see this change, as artificial intelligence impacts more areas of society. Within the election itself, the ability to create fake videos, images and voices could have a profound impact.
Immigration is also likely to be high on the agenda, as it’s a key political issue. Biden recently negotiated an agreement on immigration with the US Senate. However, the House of Representatives has declined to consider it citing that it’s too close to an election. If the House of Representatives doesn’t take any action on the current proposal, Biden will want to do that quickly at the start of his next term.
If Trump is Triumphant
We expect to see large tax cuts for companies and individuals if Trump prevails. The real estate sector would likely be a significant beneficiary, as this would support Trump’s personal business interests. Reducing corporate taxes would boost company profits, so we’d probably see an initial boost for stocks. Consumer spending power would increase as well. Longer term, though, this could lead to higher inflation.
Trump has made no secret if his disdain for higher interest rates. It’s not surprising, given that higher interest rates create a more challenging environment for property developers. Jerome Powell’s term as Chair of the US Federal Reserve ends in 2026 and the next President would have to nominate a successor. Trump might replace Powell with someone more likely to reduce interest rates. There is a longer term risk that if Trump were able to appoint several individuals to the Federal Reserve board willing to take direction from him, then monetary policy could cease to be fully independent. A scenario where the market loses confidence in US monetary policy is the biggest risk to financial markets. We might see interest rates reduced in the short term, but combined with tax cuts this could lead to higher inflation in the long run.
Foreign policy would also see change under Trump, with the United States pulling back from international diplomacy. Laws have been changed to prevent Trump from withdrawing the US from North Atlantic Treaty Organisation (NATO), a joint defense agreement created after World War 2. He could undermine it in other ways, such as not providing funding or not appointing representatives to interact with the organization. With the conflict between Ukraine and Russia ongoing, this would weaken Europe’s position.
What does this mean for investors?
Markets tend to look through election ‘noise’ in the run-up until the outcome is better known. The US economy is in a strong place as a result of four years of spending and investment. It’s an increasingly insulated and self-sufficient economy. We haven’t changed our investment approach in anticipation of the election. If Trump is re-elected then we expect increased volatility and unpredictability. But, even with Biden continuing for a second term we’re still likely to face a volatile environment.
Over the past year, we’ve increased exposure to government bonds. Government bonds, and particularly US Treasuries, can perform well during periods of uncertainty. There’s also one potential silver lining: there has been greater divergence in economies recently – most notably in economic growth and inflation. If this trend continues, it could make it easier to have diversification within portfolios.
Please check in again with us soon for further relevant content and market news.
Chloe
15/03/2024
Please see below March’s Investment Outlook from Evelyn Partners, which was received late yesterday (12/03/2024) afternoon:
Global economic growth continues to be resilient, providing a backbone of support for companies to deliver on analysts’ earnings expectations. The J.P. Morgan Global Composite Purchasing Managers’ Index, a lead indicator for Gross Domestic Product (GDP), covering both manufacturing and services, shows evidence of gathering steam in January. It reached a level that is consistent with global real GDP growth of 2.8% and has steadily improved over the last few months.
In short, economies have been able to defy the pessimistic expectations from a year ago due largely to healthy job creation as firms continue to replace workers that left the workforce during the Covid pandemic. US demand for available workers (employed plus job openings) is running around 2 million higher than the supply of workers (employed plus unemployed). This points to a healthy jobs market and increases the likelihood that the US can avoid a recession.
A key risk for financial markets is that rapid growth rekindles inflationary pressure and central bankers reconsider their intentions to cut interest rates. Although in the Monetary Policy Committee’s (MPC) last interest rate setting meeting, some Bank of England (BoE) observers noted that inflation could drop below 2% in spring, enough to warrant an interest rate cut. Indeed, the BoE removed its tightening bias and shifted to a more neutral setting by arguing that risks were “more evenly balanced”.
However, elevated wage growth is still a concern for the hawks on the MPC. The Bank’s annual Agents Survey expects wages to expand by 5.4% in 2024, which is above the latest 4% rate of consumer price inflation in January. Should wage data come in stronger than expected it could lead to upward, cost-push pressure on prices. Under that scenario investors could have to wait until later in the year for interest rate cuts.
Wage inflation is less of a problem for the US central bank. The comprehensive Employment Cost Index (ECI), which includes wages, bonuses, and benefits for US civilian workers, grew 4.2% in the fourth quarter of 2023 from a year ago. This is down from a peak of 5.1% in the second quarter of 2022. Importantly, the number of workers quitting their jobs to look for better paid opportunities has steadily fallen over the past year. As a lead indicator for the ECI, the quit rate suggests that the risk of an upward spiral in overall compensation rates has likely eased. Given that consumer inflation is getting close to its 2% target rate, the Federal Reserve will probably feel confident to begin an interest rate cutting cycle in the coming months.
Overall, investors are becoming a little more comfortable that central banks can balance growth and inflation. Given the economic backdrop is relatively benign, the pressure could be on firms to exceed, or at least meet, market expectations for company earnings, and particularly for large-cap stocks.
The Magnificent Seven companies (i.e. Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) have become a dominant proportion of equity benchmarks. This group currently accounts for 29% of the S&P 500 by market capitalisation and were responsible for around 60% of the returns achieved by the index in 2023.
These Magnificent Seven stocks generated significant net income to enable them to outperform the equity benchmark last year. However, this year has been a different story, as only four of the seven names are currently outperforming the S&P 500. This recent earnings season could hold some clues as to why. Nvidia and Meta have been the biggest drivers of returns so far in 2024, as both companies beat analysts’ estimates and posted strong earnings figures for the fourth quarter of 2023. Take Nvidia, a company that is best known for designing some of the world’s most advanced computing chips. It has seen its earnings for the most recent quarter increase by over 450% compared to 12 months prior.
This rapidly increasing demand for chips is due to firms implementing Artificial Intelligence (AI) into their businesses, as advanced chips are essential to accelerating AI-led processes. This bumper earnings report saw Nvidia’s market capitalisation increase by over $275 billion on the day following its latest earnings announcement, the largest daily increase in market value for any listed company ever.
In contrast, Tesla has been the worst performer of the group this year. It was the only member of the Magnificent Seven to miss on analyst earnings expectations in the fourth quarter and has since seen large downward revisions to its earnings growth outlook. Falling profit margins have hindered the electric vehicle maker’s profitability. This could be in part due to recent price cuts implemented to stay competitive against rival Chinese electric vehicle manufacturers. With this constrained earnings outlook and considering that they’re the only member with a market value below $1 trillion, it might be time to reassess their membership of this exclusive club.
To summarise, the macro environment remains supportive for company earnings, and particularly for large cap stocks to drive the overall market. However, there are still risks. Analysts have already forecast strong earnings outlooks for most of these Magnificent Seven companies over the next five years and valuations have been bid up. The risk is this group of stocks fail to achieve these elevated expectations. Given the Magnificent Seven make up a decent chunk of the US (and global) stock markets, should they miss their earnings forecasts it would likely prove a headwind for stocks overall. Nevertheless, on balance, solid economic growth and lower inflation means this risk is probably manageable.
Please continue to check our blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.
Carl Mitchell – DipPFS
Independent Financial Adviser
13/03/2024
Please see below article received from Blackfinch this morning, which provides a detailed global market update for February 2024.
February was a record-breaking month for equity market returns, with several regional indices hitting all-time highs. The key stories were in the US and Japan, with US returns driven by the darling of the Artificial Intelligence (AI) world, Nvidia, boosting sentiment across the market. Japan boasted an impressive corporate earnings season, as well as stark improvements in corporate governance, which helped Japan’s largest index burst through the ceiling set at the end of 1989, when Tokyo real estate was the most valuable on the planet. On the economic front, the UK officially moved into its long-expected technical recession, which sparked some concern for domestic investors. Disappointing inflation data in the US was
largely shrugged off in equity markets by the sheer excitement of AI, as well as the US economy continuing its strong economic growth trend.
Bank of England hints that interest rate cuts are coming…
but not quite yet
• The UK officially moved into a technical recession – defined as two
consecutive quarters of falling national output – at the end of 2023.
The Office for National Statistics (ONS) reported that UK gross domestic
product (GDP) declined by a larger-than-expected 0.3% in the fourth
quarter, following a fall of 0.1% in the third quarter. Although this caused
some concern for local investors, Bank of England (BoE) Governor Andrew
Bailey said he expects this recession will be “shallow” and short-lived.
• UK consumer price index (CPI) inflation remained at 4% in January.
Economists had expected a small increase to 4.2%, meaning it was a softer
reading than predicted and reaffirmed hopes of meeting the BoE’s 2% target.
• The BoE’s decision to maintain interest rates at 5.25% in February, a 16-year high, was no surprise. However, the decision wasn’t unanimous, as varying Monetary Policy Committee (MPC) members voted in different directions, with some preferring to increase the rate by 0.25% and another member opting to reduce it by 0.25%.
• The ONS reported that annual growth in regular earnings, excluding
bonuses, was 6.2% in the fourth quarter of 2023, while pay rises, including
bonuses, reached 5.8%. Economists had expected 6.0% and 5.6%,
respectively. A strong jobs market and wage growth will likely make the
MPC apprehensive about cutting interest rates too soon.
China fighting an uphill battle to economic recovery
• China continued to fight deflationary pressures in January, adding to
uncertainty surrounding its economic outlook, with prices having fallen
at the fastest rate in 15 years. CPI inflation declined 0.8% year-on-year
for January, which marked the fourth straight month of declines and
the sharpest contraction since 2009, after the Global Financial Crisis.
The inflation rate was dragged down by falling food prices, which
dropped by 5.9% year-on-year.
• China did report some encouraging economic data in terms of increased
revenue. Revenue from tourism during the Lunar New Year holiday surged
47.3% year-on-year and surpassed 2019 levels. Domestic tourism spending
hit 632.7bn yuan (£69.7bn), according to government figures, thanks to a
domestic travel boom amid a longer-than-usual break.
• However, we are still seeing a continued trend that foreign direct investment (FDI) into China last year increased by the lowest amount since the early 1990s. China’s direct investment liabilities, a broad measure of FDI, rose by $33bn in 2023, down 81.7% from 2022, according to the State
Administration of Foreign Exchange.
US economy proves too strong for its own good, quashing hopes
of earlier interest rate cuts
• US CPI inflation declined to 3.1% in January, down from 3.4% in December,
but higher than the 2.9% reading economists expected. This was a
disappointing figure at the headline level.
• However, the Personal Consumption Expenditures (PCE) index – the
preferred inflation measure of the Federal Reserve (Fed) – increased by
2.4% in the year to January, down from 2.6% in December. This would have
helped reassure the Fed that inflationary pressures were easing. The core
PCE index, excluding food and energy costs, showed prices rose 2.8% in
the year to January, down from 2.9% a month earlier.
• Despite the positive PCE inflation news, the US jobs market appeared far
too strong for the Fed to consider cutting interest rates just yet. The US
Labor Department reported that employers added 353k new jobs in January taking the unemployment rate to 3.7%, still close to the 50-year low.
• The most disconcerting feature of the jobs report for the Fed was the
strength in worker pay, as average hourly earnings jumped by a surprisingly strong 0.6%. That was the fastest increase in two years, lifting the year-over-year increase to 4.5% from 4.3% in December. This is not the direction the Fed wants to see, as it views taming wages as a critical step in wrestling inflation down to its target.
Summary
As mentioned, it paid dividends to be an equity investor in February. Although economic data across the globe was somewhat mixed, investors in Western markets were again swept up in the AI craze. China was the surprise package for the month, however, with indices rallying due to more targeted stimulus measures from the government. Despite this, Chinese equities remain at 20+ year lows against broader equities. The mood music in the region is still gloomy, as overseas investment expanded at the slowest pace in 30 years in 2023, although GDP did grow by 5%.
Turning to bonds, the outlook turned negative on rate cuts, with the yield on the ten-year UK government bond (gilt) rising from 3.79% at the start of February to 4.12% by the end of the month, and with the ten-year US Treasury yield increasing from 3.92% to finish the month paying 4.26%. The outlook for high-quality investment grade bonds continued to improve, as February saw over $150bn in new issuance in the US, a record-breaking amount.
Away from equities and bonds, property and infrastructure both fell in value for the month. These assets are particularly sensitive to shifts in interest rate expectations and fell victim to the conclusion from the market that interest rate cuts may not come as quickly as previously hoped, especially in the US.
Please check in again with us soon for further relevant content and market news.
Chloe
08/03/2024
Please see below an article published by AJ Bell late yesterday (06/03/2024) afternoon summarising the main points from the Chancellors Spring Budget which was delivered in Parliament yesterday.
Today’s Budget was short on surprises, with most of the key announcement already having been briefed to the national media advance.
Key changes announced today include the proposed introduction of a British ISA, a further cut to National Insurance rates for both employed and self-employed workers, relaxation of the ‘high income’ child benefit tax charge, and a proposed summer date for the government’s forthcoming NatWest share offer to retail investors.
British/UK ISA
The Chancellor announced plans to launch a new UK ISA (although he referred to it as a ‘British ISA’ during his speech in parliament), with an annual subscription allowance of £5,000
This will be in addition to the existing £20,000 ISA allowance, with all investments restricted to UK assets.
A consultation on the plans will run until 6 June 2024, with the government proposing that the UK ISA would be restricted to UK shares, gilts and UK corporate bonds. The consultation also suggests preventing holders keeping cash in the accounts, effectively forcing them to invest the money in UK assets.
There is still much to be confirmed and the proposals could yet change considerably, especially given that any future UK ISA product is likely to be introduced after the next General Election.
National Insurance
The government has announced a further cut of 2 percentage points to National Insurance, following the cut previously announced at the Autumn Statement and which applied to employed workers’ payslips from January this year.
In aggregate, it means a cut of 4 percentage points to the entry rate of National Insurance since December 2023, with better paid workers seeing a £1,508 boost as a result of the cuts.
It is worth bearing in mind that income tax thresholds have been put into deep freeze, creating a so-called ‘fiscal drag’ effect that has pulled many people into a higher rate of income tax.
For many taxpayers, these changes will only go part way to making up for the additional tax they’re paying as a result of the freeze on income tax thresholds and the personal allowance.
Self-employed NI will also be cut further. Around 2 million self-employed people will see a boost to their earnings from next month, as their National Insurance bill drops significantly. The previously-announced changes from the Autumn Statement were due to come in from April but have now been superseded by a further significant cut to rates. It means that the National Insurance rate for Class 4 contributions paid by the self employed has been cut from 9% to 6%, at the same time as the Government has scrapped Class 2 contributions.
Child benefit
Under the current system, child benefit is gradually withdrawn for those earning more than £50,000 a year. It means households with one earner bringing home £60,000 a year currently get nothing (they can still claim child benefit, but repay it through the high income tax charge).
Under the government’s proposed reforms, the point at which child benefit begins to be withdrawn will increase to £60,000.
Those earning between £60,000-£80,000 a year will see their child benefit gradually withdrawn. So this is good news for those households with earnings of between £50,000-£80,000 who would previously have had to repay any child benefit claimed, but will now be eligible for at least some of it.
Looking further ahead, the government says it wants to reform the system so that eligibility is based on a couple’s combined earnings. Currently, a sole earner on £60,000 gets no child benefit while two earners each on £49,000 will get the full benefit. The reforms could change that, although they aren’t pencilled in until April 2026. Much could change before then.
NatWest
Government has previously pledged to launch a retail share offer for NatWest, giving ordinary investors a chance to buy a chunk of the bank, which remains partially under state ownership.
The Chancellor signalled this could happen in the summer ‘at the earliest’, declining to set a clear timetable for the sale.
There is a fine line to tread here, since the government needs to balance getting a good deal for the taxpayer, while also offering an enticing opportunity for investors without suppressing the value of shares already in circulation.
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Carl Mitchell – DipPFS
Independent Financial Adviser
07/03/2024