Blogs

Please see below, an update from Evelyn partners detailing the March inflation figures and Monetary Policy Committee meeting outcome. Received today – 21/03/2024

What happened?

The Bank of England (BoE) held the base rate at 5.25% at their meeting today. This was consistent with market expectations and marks the fifth consecutive meeting where rates have been held at this level.

There was, however, a notable shift in the committee votes, with nobody voting to increase interest rates. Eight members voted to hold the base rate at 5.25%, with Jonathan Haskel and Catherine Mann dropping their votes for higher interest rates, while Swati Dhingra continued to vote for a 25 basis point cut.

This follows February’s CPI print (released Wednesday), which came in slightly softer than expected at 3.4% year-on-year (vs consensus of 3.5%). Core CPI, which better reflects domestic price pressures, was reported at 4.5% year-on-year (vs consensus of 4.6%).

What does it mean?

As anticipated, the BoE held the base interest rate at 5.25%. But today’s change in votes signals that we are getting closer to interest rate cuts. Haskel and Mann, longstanding hawks, dropped their votes for higher rates, making this the first meeting since September 2021 with no votes for higher rates.

Moreover, the softer than expected February inflation print should give the monetary policy committee (MPC) more confidence that inflation is on the right track. CPI rose by 3.4% in the 12 months to February 2024, down from 4.0% in January. The largest downward contributions to the CPI annual rate came from food, and restaurants and cafes, while the largest upward contributions came from housing and household services, and motor fuels. Although the services component of CPI remains elevated at 6.1% year-on-year, and the MPC will want to see more progress on this measure before they commit to a rate cutting cycle.

On the growth side, the data is showing tentative signs that UK economic growth might be turning the corner. The UK composite PMI reading for March was 52.9, marking the third month in a row above 50 (50 signals expansion vs the previous month). This implies that the technical recession experienced in the second half of 2023 is now over.

Today’s meeting doesn’t seem to have materially changed the calculus for money market traders, although the probability of a June rate cut has increased to 70% from 50% at the start of this week. The market took the decision and communications as dovish, with sterling weaker against the US dollar and gilt yields falling across the curve.

Bottom Line

The BoE held interest rates at 5.25%, although today’s change in voting patterns signals that we are getting closer to a first interest rate cut. We continue to expect this will materialise around the middle of the year as inflation decelerates to the 2% mark.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Kitteringham

21^st March 2024

Please see below, an article from Evelyn Partners explaining the implications for markets of the latest Federal Open Market Committee meeting and rate decision. Received last night – 20/03/2024

What happened?

The Federal Open Market Committee voted unanimously to keep rates on hold at 5.5% (upper bound) at the conclusion of their meeting today. This was in line with market expectations and is the fifth consecutive meeting where rates have been held at the same level since the last increase in July 2023.

The Fed also today released its quarterly ‘dot plot’ which tells markets where committee members see interest rates going in the future. It showed no change from their December publication in terms of median rate expectations for the end of 2024 at 4.6%, suggesting 75bps of cuts from current levels.  Importantly, it did show revised expectations for where rates will be at the end of 2025 at 3.9%, suggesting one less cut than their estimate in December.

What does it mean?

No change in rates at today’s meeting came as no surprise to financial markets, which were pricing the chances of a cut at less than 1% going into the meeting. There were no significant changes in the wording of the statement today, and the ‘dots’ revealed fewer rate cuts to come but with one taken from 2025, rather than 2024 as some analysts had been speculating. Officials also increased forecasts of where they see rates settling over the long term, increasing their median estimate from 2.5% to 2.6%.

Interest rate expectations have moved a long way since the Fed’s last meeting on the 31 January. Immediately following that meeting, futures markets were pricing in six interest rate cuts over the course of 2024, while their ‘dot plot’ (which was published in December) was suggesting there would be only three. Since then, markets have slowly fallen into line with Fed thinking, with the latest market estimation for the number of rate cuts this year also being three, immediately before today’s meeting. That was largely thanks to month-on-month core CPI inflation prints for both January and February coming in 10 basis points higher than market expectations – stickier than expected. Producer Price Index inflation readings (a price measure at the wholesale level) have also come in hotter than expected, leading to bond market inflation expectations to move from around 2.2% (CPI) annually for the next 5 years to around 2.4%. Interestingly, the Fed’s preferred measure of inflation, the PCE deflator was not stronger than expected, with the headline measure for January coming in at 2.4%. This inflationary backdrop led the Fed to increase their estimates today for PCE inflation to 2.6% from 2.4% by the end of the year.

On the growth side of the equation, payroll gains have been strong in January and February although unemployment ticked up to a 2 year high of 3.9%. Q1 GDP is tracking close to 2% after the remarkable strong 4% seen in the second half of last year – lower but still above the long run rate.

This varied economic backdrop led the committee to repeat the guidance in the previous statement that it doesn’t expect to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%.”

Officials maintained the pace of quantitative tightening, with a maximum of $60 billion of Treasuries and $35 billion of mortgage-backed securities rolling off the balance sheet each month, and no guidance of any changes to this.

Bottom Line

There weren’t many surprises out of today’s Fed meeting, and therefore market expectations (and our own) for interest rates have not changed.  The equity market hasn’t been put off its stride by the prior moderation in cut expectations in quite the same way that the bond market has, but with futures markets finally in line with the fed, we would expect one source of volatility, particularly for the bond market, to dissipate. Clearer visibility over cuts should be a more benign backdrop for positive performance from both equity and bond markets.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Kitteringham

21^st March 2024

Please see the below article from EPIC Investment Partners providing their update based on the latest UK inflation data. Received this afternoon.

UK CPI has fallen to the lowest level since September 2021 as easing prices for food, hotels and restaurants helped offset an increase in fuel prices and household services. The Office for National Statistics (ONS) said CPI dropped to 3.4% in February, 0.1% below the market consensus and the 4% recorded previously. Core inflation, so excluding volatile food, energy, alcohol, and tobacco prices, came in at 4.5%yoy, also 0.1% below estimates, and the previous reading of 4.1%. 

Following the release, Grant Fitzner, chief economist at the ONS, said: “Inflation eased in February to its lowest rate for nearly two-and-a-half years. Food prices were the main driver of the fall, with prices almost unchanged this year compared with a large rise last year, while restaurant and cafe price rises also slowed. These falls were only partially offset by price rises at the pump and a further increase in rental costs”.

However, the drop in inflation is unlikely to have a material impact on the Old Lady’s rate decision tomorrow. The market was already overwhelmingly looking for the BoE to hold rates at 5.25% for a fifth straight meeting. The central bank is likely to stick to the script, acknowledging the possibility that the of the next move could be lower, while remaining vague about the timing.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

20/03/2024

Please see the below article from Brewin Dolphin giving their overview of global markets. Received yesterday.

Guy Foster, Chief Strategist, discusses improvement in the UK housing market and its effect on the wider economy, while Janet Mui, Head of Market Analysis, analyses the good and the bad news following fresh U.S. inflation data.

Hopes for seemingly enormous interest rate cuts during 2024 have been dissipating since the year began. Two months ago, investors thought U.S. interest rates would finish the year at just over 3.5%. Now that is just over 4.5%, implying there may be three interest rate cuts. But why the change in mood?

In short, inflation has remained stickier than expected. Last week’s U.S. consumer price index (CPI) print saw core inflation slightly above estimates for the second month in a row. Recent monthly readings have been consistent with a rate of core inflation of 4%, which is clearly too high.

Core CPI excludes the volatile food and energy prices that can make interpreting the data difficult. After this adjustment, shelter inflation makes up 45% of what is left. Some of the shelter data is very lagged in its impact because it relates to when tenancy agreements are renewed. Therefore, the Federal Reserve has discussed core services excluding shelter (so called super-core inflation) as a preferred measure. That rate also remains well above the Federal Reserve’s target rate.

On Thursday, producer price indices, which measure the prices of goods sold by their manufacturers, were also above estimates. This seems to fit the phenomenon that we have been highlighting over the last few months, that more companies are experiencing high services output prices.

A matter of ‘when’ rather than ‘if’?

All this sounds pretty concerning given the narrative for 2024 has been about interest rate cuts, and markets have certainly paused for breath. So far, though, investors still believe the question is ‘when’ rather than ‘if’ rates will be cut. Despite a full percentage point of cuts for this year being erased, long-term bond yields have risen by around 0.2%.

Theoretically, if you believe that companies are valued based upon bond yields with an acceptable equity risk premium, the stock exchange would be quite responsive to small changes in bond yields, but the evidence to support this is lacking.

Instead, the interaction between share prices and interest rates seems more likely to reflect the broader concept of liquidity, which so far this year remains reasonably abundant. The notable risk on this front would be if liquidity support for U.S. regional banks was to diminish, as we are now a year past the crisis.

U.S. retail sales accelerate in January

U.S. retail sales expanded at the fastest pace in five months during January, which could have given policy makers more inflationary fears to fret over. But this rebound reflected an improvement in the weather rather than a resurgence in animal spirits. Inclement weather caused a sharp decline in shopping trips during January and most of the recovery in February was driven by building materials and garden equipment, both of which are weather sensitive. U.S. goods demand therefore remains in the doldrums, with services having been the category of choice for consumers.

Chinese stocks bolstered by new growth target

Chinese stocks had a good week overall but were struggling for momentum by the end of it. The enthusiasm for these stocks has been bolstered by the idea that the newly announced growth target implies powerful stimulus must be coming.

Alas, it remains a trickle rather than a gush.

Despite property prices, which we learnt on Friday are continuing to decline, and bank loan growth, which decelerated to its slowest pace on record last month, the authorities have not been forthcoming with stimulus. Instead, China drained liquidity from the banking system during February and held interest rates steady.

The Chinese economy has shown some green shoots of recovery, with prices at last rising again in February after four months of deflation. It seems likely more stimulus through lower reserve requirement ratios and lower interest rates will eventually be unleashed.

UK GDP estimate turns positive in January

Green shoots are also evident in the UK. The January estimate of monthly gross domestic product (GDP) turned positive, which was implied by the already-released retail sales numbers for that month.

The recovery in the housing market continued as well, as last week’s Royal Institution of Chartered Surveyors (RICS) house price index would seem broadly consistent with house price growth of up to 5%. Demand for housing has recovered following a normalisation in borrowing costs. Most encouraging is that new sellers are entering the market as well, suggesting the recent uptick in prices is perceived to last. And it’s not just the secondary market for homes that is recovering.

More housing market activity also seems to be drawing a line under the fifteen-month housebuilding recession that the UK has suffered. More housing transactions are good for economic activity as they are labour intensive to build and even selling already existing homes triggers a chain of connected economic activity from financing to furnishing.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

20/03/2024

Please see today’s daily update from EPIC Investment Partners below:

To call it well flagged would be an understatement. Overnight, the Bank of Japan (BoJ) ended the world’s last negative rate policy, raising interest rates for the first time in 17 years. The central bank raised rates to the range of 0% to 0.1%, from -0.1%, after acknowledging its long-held goal of 2% inflation was within sight. The bank will also scrap its yield curve control (YCC) policy, along with purchases of exchange traded funds and Japan real estate investment trusts (J-REITS). However, it will continue buying long-end JGB’s at “broadly the same amount” as before.  

As we mentioned in Friday’s Daily Update, it was reported that the BoJ’s decision hinged on the outcome of the yearly wage negotiations by Japan’s largest union, Rengo. Japan’s largest companies agreed to hike wages by 5.28% for 2024, the largest increase in 33 years, and 3.5% above the average of the last 20 years.  

In the statement released after the decision, the BoJ said: “Services prices have continued to increase moderately, partly due to the moderate wage increases seen thus far”. “As these recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has become more solid, the Bank judged it came in sight that the prices stability target would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 outlook report,” the central bank added. 

In the post-meeting news conference BoJ Governor Kazuo Ueda comments were balanced. Ueda admitted that the stronger-than-expected wage growth had played a large role in the decision. He reiterated that the price target was within sight and that the upward economic cycle has been confirmed by recent data releases. However, he expects the BoJ to remain accommodative until the underlying inflation eventually reaches 2%, whilst not taking the option of future hikes off the table. 

Talking of inflation, one person whose prices have sky-rocketed over the last year is the tooth fairy. According to a report in the WSJ, it appears that if the tooth fairy leaves your little ones a pound under their pillow for their teeth, they are entitled to feel hard done by.  

In 2023, the average payout for a lost tooth in the US was at a record high of $6.23, a 20% increase from 2022. However, that’s not the half of it. The report also states some of the jaw-dropping items some children get for losing their teeth. This includes silver fairy necklaces, Louis Vuitton bracelets, even brand-new iPhones!

Please check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Charlotte Clarke

19/03/2024

Please see today’s Daily Investment Bulletin from Brooks Macdonald:

What has happened

Yesterday, we saw small pullbacks in the market with the S&P 500 slightly retreating by 0.19% from its record peak, while the yields on 10-year Treasuries edged up for the third consecutive day. Tech sector underperformed, as NASDAQ lost 0.54% and the ‘Magnificent 7’ group fell 0.74%. These movements reflect growing concerns about the sustainability of the recent market rally, particularly considering the S&P 500’s sharp rise of over 25% in less than 100 trading sessions. Additionally, inflation remains a key point of focus, with the US CPI release casting doubt on the Federal Reserve’s ability to implement rate cuts by June.

PPI and retail sales preview

Today’s spotlight will continue to shine on inflation with the release of the US Producer Price Index (PPI) and retail sales data. The PPI is particularly significant as it includes several components that contribute to the Personal Consumption Expenditures (PCE) inflation measure, which the Federal Reserve targets. Although the PCE data will not be available until the end of March, today’s PPI figures will provide a clearer indication of what to expect. Meanwhile, the retail sales report is not anticipated to significantly alter the broader narrative of consumer resilience, despite some recent indications of a cooling labour market that could signal a deceleration in consumption growth.

What does Brooks Macdonald think

Although the tech sector underperformed yesterday, it is still the biggest driver of recent market momentum. Tuesday’s gains in the stock market, post-CPI release, were propelled by tech companies such as Nvidia and Oracle, which reported earnings that surpassed expectations, and Wednesday’s modest pullback was again led by the tech industry. Notably, Tesla’s shares dropped by 4.54%, making it the poorest performer in the S&P 500 year-to-date with a 31.8% decline, surpassing Boeing’s downturn. This increasing divergence within the tech mega-caps is certainly one to watch as it could affect overall investors’ sentiment and the scope of broadening of the current equity market rally.

Please continue to check our blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.

Andrew Lloyd DipPFS

14/03/2024

Please see the below article from Blackfinch Investment LTD providing a brief analysis of the key factors currently affecting global markets and economies. Received yesterday.

UK

Chancellor of the Exchequer, Jeremy Hunt, delivered a Spring Budget that received a muted market reaction. The key takeaway for households was that the main rate of Class 1 employee National Insurance Contributions would be reduced from 10% to 8% from 6th April. This was in addition to the 2p cut announced at the 2023 Autumn Statement 2023 which came into effect from 6th January.

Hunt also announced the introduction of a new Individual Savings Account (ISA) and British Savings Bonds. The UK ISA will give savers an extra £5,000 tax-free allowance on top of the existing £20,000 ISA allowance, to encourage investment into UK-focused assets.

The latest House Price Index from Halifax reported that UK house prices increased 0.4% in February, the fifth monthly rise in a row. Property prices were 1.7% higher on an annual basis, a slowdown from the 2.3% increase in the 12 months to January. An average UK home now costs £291,699, around £1,000 more than last month.

Housebuilding, which has been contracting in recent months, saw its biggest turnaround since January. The Purchasing Managers’ Index (PMI) jumped to 49.8, up from the previous month’s 44.2, reflecting the recent boost in sentiment that interest rate cuts are coming this year.

The S&P Global UK composite PMI, which tracks activity at services companies and manufacturers, increased from 52.9 in January to 53.0 in February. This indicated a pick-up in growth, after service sector companies reported a sustained increase in business activity, with the fastest rise in new work since May 2023.

North America

Recent US economic data boosted expectations that the Federal Reserve could begin cutting rates sooner than expected, with concern of a ‘hot’ jobs market beginning to dissipate. The US unemployment rate rose to 3.9%, the highest since January 2022, against expectations of staying at 3.7%. In terms of wage growth, average hourly earnings rose 0.1% in February from January, less than the 0.3% growth forecast by economists. Finally, the US Labor Department reported the US economy added 275k jobs in February, more than the expected 200k.

Europe

The European Central Bank (ECB) left its key interest rate at 4.50% after its latest policy meeting. Importantly, its latest staff projections show inflation forecasts has been revised down to an average 2.3% in 2024 and 2.0% in 2025. These forecasts has raised hopes that borrowing costs could come down sooner than thought.

Turkey’s consumer price index (CPI) increased by 67.07% annually in February, up from 64.9% in January, showing prices rising even faster than expected. On a monthly basis, prices rose by 4.53% in February. The Turkish central bank maintained interest rates at 45%, pausing a hiking cycle that had lifted borrowing costs by 3,650 basis points since May 2023. A year ago, rates were down at 8.5%, before a series of hikes to cool inflation.

The final Eurozone Gross Domestic Product (GDP) estimate confirmed the economy stagnated in Q4, barely improving on the 0.1% contraction seen in Q3. A historical data revision meant overall GDP growth came in at 0.4% last year, 0.1% lower than previously thought.

German factory orders plunged 11.3% month-on-month in January following an upwardly-revised 12% rise in December 2023. While the wild swings were attributed to volatility in big-ticket orders, core orders shrank 2.1% over the month. Core investment and consumer goods orders contracted over the month, as the impact of past rate hikes dampened consumer demand and the elevated uncertainty derailed investment.

Asia

According to the revised estimates, Japanese GDP grew 0.1% quarter-on-quarter in the fourth quarter of 2023, instead of a 0.1% dip in the initial estimate, reflecting an upgrade in business investment.

India became the fourth largest stock market in the world with a market capitalisation of INR 390trn (over USD 4.6trn) at the end of February, following five consecutive years of growth. The bull run reflects the combination of strong domestic and foreign buying.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

12/03/2024