Please see below Brooks Macdonald’s Weekly Market commentary, received yesterday afternoon – 25/09/2023
Brooks Macdonald Weekly Market Commentary
- Bond yields rose last week after a hawkish Federal Reserve meeting combined with strong labour market data
- This week sees the US revise its gross domestic product (GDP) estimates from as early as Q1 2005 which will inform future GDP expectations
- Inflation will be in focus this week with the US, Euro Area and Japan all releasing important data
Risk appetite improved yesterday with the US equity market enjoying its broadest rally of September so far. Small cap US equities, which have underperformed their larger cap equivalents in 2023, outperformed on the day. European equities and UK equities also posted strong returns.
These rallies within equity markets happened despite the oil price continuing to grind higher. Brent Crude, the international oil benchmark, hit another year to date closing high of US$93 with the price now above US$94 today. The first order impact of this will be US gasoline prices which will continue to make the September month-on-month headline inflation numbers challenging. Other commodity prices may also be impacted by the El Nino event which is now expected to be more severe. The dramatic temperature fluctuations disrupt crop cycles and therefore put pressure on global food supply alongside the current grain supply issues from Ukraine.
The market implied probability of an interest rate hike from the European Central Bank (ECB) yesterday had been edging up in the last week and ultimately proved correct as the ECB hiked by 25bps. The ECB deposit rate is now at its highest level since the ECB’s creation and the last 15 months of hikes also represent the fastest pace of hikes in its history as well. It was however a closer call than previous meetings with President Lagarde pointing to a ‘solid majority’ within the committee backing the hike which feels softer than the traditional ‘overwhelming’ majority for other hikes. The ECB also raised its inflation projections for this year and 2024 with higher energy prices the main justification for this. Economic growth forecasts were revised lower with hopes for a Euro Area recovery pushed into 2024.
With the ECB revealing this incremental hike yesterday, the key question is whether this is now the peak interest rate for the cycle. President Lagarde was asked this specifically, replying that ‘we can’t say that’ given the economic and inflation uncertainties. The market is pricing in a 45% chance of a further hike from the ECB before the end of the year but whether this transpires will be highly dependent on the evolving inflation picture.
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Charlotte Clarke
26/09/2023