Blogs

Happy new year to all! Please see the below article from AJ Bell providing their insight on the five themes to watch for investors in 2024. Received last week.

No adviser or client knows what is coming next, and whether inflation, stagflation or deflation will result from the combination of the interest rate pauses, Quantitative Tightening, pay increases, rising debt and elevated geopolitical tensions.

Basing investment strategies on just one scenario is probably not going to be good idea and portfolio construction may need to address range of outcomes, especially as we have elections to be fought (and electorates to be influenced) on both sides of the Atlantic in the next twelve months.

Carefully following five major investment themes may help advisers and clients sense which way the wind is blowing so they can try to obtain the best possible risk-adjusted returns for their portfolios, especially once they take the all-important issue of valuation into account.

Debt

Debt-to-GDP is one barometer to watch, but according to the Bank of International Settlements it should be studied in conjunction with the percentage of tax income that is used to meet the interest costs. When that latter figure got to around 20% in 2007 (and was still rising), the financial markets buckled and nearly took the global economy with them.

FRED – St. Louis Federal Reserve database, Congressional Budget Office, LSEG Datastream

China and France are the two countries in this invidious position now, but the USA is catching up fast, as the Biden administration spends like fury on the CHIPS and Inflation Reduction Acts.

America’s latest annual fiscal deficit was $1.7 trillion, in the year to September 2023, the third-worst number on record, and the annualised interest bill has hit $1 trillion, or 20% of tax income. America cannot afford to keep interest rates where they are for long and there is a risk that the Fed has to cut rates to keep the burden manageable and take risks with inflation. This may be why gold (and Bitcoin, for that matter) are on a roll. Markets are pricing in five rate cuts from the Fed in 2024, but because inflation is cooling and growth benign, not because debt is a problem and interest costs are squeezing economic growth.

Wages

The 1970s’ inflationary outburst may have been prompted by loose monetary policy in the UK (and loose fiscal policy in the USA), followed by 1973’s oil price shock, but a vicious circle of higher pay demands, higher prices, higher pay demands, and higher prices then developed.

FRED – St. Louis Federal Reserve database, Office for National Statistics

Financial markets may therefore cheer a modest increase in unemployment, and central bankers accept it, as higher joblessness could help to put a lid on wages and inflation and thus provide scope for rate cuts. Equally, a sharp rise in the jobless rate could signal economic trouble, or at least more than is currently factored in by consensus earnings forecasts, so policymakers have a tricky balancing act here.

The Magnificent Seven

The stock

markets’ rally in 2023, and the return to favour of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla, suggests equities are pricing in an economic soft landing and a return to the low-growth, low-inflation and low-interest-rate environment of the 2010s that did so much to help the performance of long-duration assets like bonds and growth sectors, such as technology.

LSEG Datastream data

They might be right. But if they are wrong – and those five Fed rate cuts do not appear on schedule in 2024 – then the Magnificent Seven’s aggregate $11.8 trillion market cap could look exposed, for all of their dominant positions in their respective industries. Their share price and profit wobbles of 2022 showed they are not entirely immune to the economic cycle, so an unexpected recession could be one challenge. Sustained inflation could be another if it keeps rates higher than expected and boosts nominal growth from downtrodden cyclicals and value stocks. Again, only a perfect middle path may do.

The yield curve

Bond yie

lds are falling again, but the yield curve remains inverted, whereby ten-year yields on Government bonds are lower than those on the two-year in the UK and USA. This is seen as a warning that a recession is on the way, as it means bond markets are factoring in interest rate cuts (the ten-year would usually have to offer a higher yield to compensate holders for the extra risk scope for things to go wrong over the longer lifespan of the debt).

LSEG Datastream data

It is not an infallible signal, but examples of soft economic landings are hard to find and stock markets are currently doing their best to ignore the bond market’s quite different message.

Oil and copper

If equities are pricing in a soft landing and fixed-income markets a harder one, commodity traders are even more confused. Oil’s renewed weakness may speak of recession. Copper, a reliable indicator of global economic health due to its many uses, is doing nothing. Gold looks to be fretting about debts and stagflation.

LSEG Datastream data

The messages from stocks, bonds and raw materials are therefore contradictory. But such are the globe’s debts that it seems likely central banks (and politicians) would rather play fast and loose and risk inflation or stagflation than recession and deflation. The experiences of 2007-09 and 2020-21 would suggest as much, anyway.

Past performance is not a guide to future performance and some investments need to be held for the long term.

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

Alex Clare

02/01/2024.

Markets

It has been another really interesting (probably too interesting?) year for us with markets, economies and invested assets being challenged again throughout 2023.

Although it has been a very bad year for conflicts globally and the ongoing human cost, this has not been the main focus for investors.  Central bank’s policies globally has been the focus for investors.  We continue to watch and interpret the data around inflation, interest rates, productivity and employment in particular.  Keeping a close eye on wage inflation.

The good news is that central banks such as the Fed, the Bank of England and the European Central Bank (ECB), look like they may have stopped increasing interest rates.  Interest rates may have plateaued.  Markets are now looking at when interest rates might fall, and this could be as early as the second quarter of 2024 for the UK perhaps?  And the second half of 2024 for the Fed and the ECB?

When interest rates do fall, we should see an improvement in investments.  In J P Morgan’s view (Long Term Capital Markets Assumptions Report and webinar launch 30/10/2023), we are in a better position for investment returns than we have been for a few years, in a more normalised market.

J P Morgan state the need for a well diversified portfolio given the current outlook, with both ‘active’ and ‘tactical’ fund management.

This appears to be the broad consensus view, although as ever, we have both Bears and Bulls.  A few fund managers are sitting on the fence and making provision for either outcome.

However, over the long term, history has proven that invested assets significantly outperform cash.  You just need to remain invested and focus on your long-term objectives.

Business Update

We have had a busy year again here at P and B IFA.  Our focus remains on servicing our existing clients and keeping them up to date with what is going on in our world and anything that might have an impact on our clients’ plans.

This year we have had significant legislative change for pensions in the Spring Budget with further clarification in the Autumn Statement and in the detail in the Autumn Finance Bill.  These changes are generally good news for our clients but not without complexity.

However, from a tax point of view we continue to see reductions in allowances and stealth taxes as some allowances and tax thresholds remain frozen, and other thresholds lowered.  This all results in a bigger tax take for the State. 

Being tax efficient and using your allowances is more important than ever.

In addition regulatory change moves at a pace with the implementation of Consumer Duty regulations at the end of July.  These changes are as ever about protecting our clients, this time they come with significant time cost to the business.

Thankfully, the use of digital technology for meetings, cutting out a lot of travel time, has allowed me to deal with the legislative and regulatory changes without working 24/7, although I don’t think I’ve ever worked harder.

We continue to work on the business and I’ve taken input from several external consultants over the year as we continually strive to offer a great service to our clients.  This is to the benefit of our clients and our staff.  I’ll keep you posted on any developments.

Consumer Duty regulations apply more broadly than to just IFAs like ourselves.  The good news here is that we hope that the new regulations will help us receive a better service from providers, life offices and platforms etc.  Now we spend too much time as the buffer working on behalf of our clients.  This year we have had to educate the staff at life offices and platforms about the new pension legislation changes, so that they can understand our instructions on behalf of our clients.

It was worthwhile in the end.  From a pension legislation point of view, we are in a better place than at the start of 2023.

Summary

It has been a busy year for all of us, but I think we are in a better place now.  Things have moved on for economies, markets and invested assets and I feel like we are making progress, although risks remain, and volatility could continue for a while.

We have improved pension legislation too, that is good news and should help us keep our pension funding at the right level as for most of us it is extremely tax efficient.

Compared to this time last year, I’m feeling more positive about the new year.  It won’t be straight forward, but I think we are starting to see improvements to the outlook.

Politically it will be an interesting year, hopefully with a normal democratic process, particularly in the US.

Wishing you and yours a healthy, happy and prosperous New Year.  I’d love to see an outbreak of peace and goodwill globally.

All the best!

Steve Speed

29/12/2023

Please see below, Brooks Macdonald’s ‘Daily Investment Bulletin’ which provides a brief analysis of the key factors currently affecting global markets. Received this afternoon – 21/12/2023

What has happened?

The relentless march higher of US equity markets was interrupted late on Wednesday with the headline index off c. -1.5% on the day. The catalyst is not clear however after markets have traded solely in one direction for several weeks, regardless of central bank speakers or the incoming data, a snap back is arguably warranted.

Central banks

Despite the negative tone within equity markets, bond markets continued their rally with the US 10-year Treasury yield falling to 3.85% while the 2-year yield is now just 4.33%. Investors continued to ramp up their expectations of imminent interest rate cuts with bond markets now implying a 92% probability of a cut by March and 1.5% of cuts next year in totality. One of the factors that may have caused the sharp sell-off late yesterday is the growing gulf between the Fed’s dot plot of interest rate expectations and what is priced into the market.

Inflation

There was good news for the UK yesterday as headline CPI inflation fell more than the market was expecting to 3.9%. This was 0.4% below expectations but the Core CPI number, which excludes food and energy, saw an even more dramatic move lower, coming in at 5.1% versus 5.6% expected. Investors increased the number of interest rate cuts they are expecting from the Bank of England in 2024 and the gilt yield curve rallied. Over in Germany, the Producer Price Index inflation numbers showed significant deflation with the index contracting by -7.9% year-on-year compared to -7.5% expected. This helped European bond markets share in the rally seen in the US and UK.

What does Brooks Macdonald think?

On top of the positive inflation stories yesterday, the Conference Board’s US consumer confidence showed a resilient US consumer. Despite this, equities fell quite substantially at the end of the day which suggests a degree of investor fatigue around quite how quickly the market outlook has shifted from bleak at the end of October to unashamedly bullish by the end of the year.

Please continue to check our blog content for advice and planning updates from leading investment managers.

Alex Kitteringham

21^st December 2023

Please see this week’s Weekly Market Commentary from Brooks Macdonald which provides a brief analysis of the key factors currently affecting global investment markets:

• The Santa Claus rally is underway after the Federal Reserve allows the market’s interest rate pivot to continue
• Despite pushback from some Federal Reserve speakers, markets expect the first US cut during Q1 2024
• Meanwhile, the Bank of Japan may only now exit its negative interest rate policy this week

After the Federal Reserve endorsed the market’s dovish pivot of US interest rate policy, risk appetite received a significant boost. By the end of the week, the US bond market implied 141bps of interest rate cuts by the end of 2024 and an over three-quarter chance that the first cut would take place by March. Bonds rallied against this backdrop with both the 2-year and 10-year yields down c. 0.3% on the week, this marks the best week for US Treasuries since the extreme market volatility of March 2020. Equities also performed strongly with the US leading the way with a 7th consecutive weekly advance.

Despite the Fed meeting sounding relatively dovish, Fed speakers on Friday were keen to push back against the growing consensus around a Q1 2024 first cut. President Williams said that the Fed ‘aren’t really talking about rate cuts’ yet and that March felt ‘premature.’ President Bostic struck a similar tone, saying that he wasn’t ‘really feeling that this is an imminent thing.’ Bostic suggested that the Fed may only start cutting interest rates from Q3, offering a counterweight to the strong bond market rally of last week. By the end of Friday the market had reduced the quantum of cuts expected in 2024 by 8bps.

The central bank focus will continue this week even as we approach the Christmas period. There has been much speculation as to whether the Bank of Japan’s negative interest rate policy would be ending at this meeting, with the market apportioning a rough 50:50 chance of that outcome. Reports have suggested that the Bank of Japan may hold off an announcement this week but strongly signal the move as ‘live’ for January’s meeting.

Whether the policy comes to an end at this meeting or next meeting is an aside to the remarkable fact that the US has gone through a full rate hiking cycle but that the disinflationary forces in Japan have been so powerful that only now is a positive interest rate on the cards.

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

19/12/2023

Please see the below Tatton Investment Management Monday Digest article received this morning – 18/12/2023.

Policy and politics set to play a pivotal role in 2024 

Heading into 2024, capital markets are in a somewhat contradictory position. Global growth has been slow (and in some places negative) for some time, while central banks have raised interest rates at the fastest pace in a generation. But despite all those challenges, equities have had a good year overall. With inflation finally falling, central banks are now loosening their vice grips, and bond markets are predicting a slew of rate cuts from the major players starting as early as March. That has pushed risk valuations in favour of equities and, perhaps more importantly over the long term, has even bolstered growth expectations. How these expectations play out will be crucial for markets next year.

And yet, anxiety lingers. The rise in equity valuations has left stocks looking a little expensive, particularly in light of damp growth expectations in some regions. And despite the fact that no one seems to believe them, central bankers beyond the US are still toeing the official line that rates will have to stay higher for longer pretty much everywhere. 

The consistent theme of this year has been that whenever markets look overexcited, monetary policymakers pour cold water over rate cut expectations. The policy outlook has become the dominant driver of markets, and ignoring what policymakers tell us has made for a volatile ride in investments all year. We expect this to continue for at least the early part of 2024. Ever since the financial crash of 2008, investors have been extremely sensitive to expected monetary policy, and 2023 was no different. This is historically unusual, but it could just be because – for most of that period – rates have been historically low. Rates staying lower for longer increases the sensitivity to rate changes because longer-duration assets gain in relative value and thus make up a larger share of the market (the so-called duration effect). Now that real interests (inflation-adjusted, i.e. what is left after inflation is subtracted) have moved higher, it is possible we will see fewer valuation effects and more focus on earnings stability and growth.

Growth prospects for the UK and Europe greatly deteriorated this year, while the US powered ahead thanks to the incredible resilience of the American consumer and considerable fiscal stimulus. Now, with inflation plummeting, interest rates will surely follow here and in Europe. Across the Atlantic, however, and regardless of the latest Fed acknowledgment that rates have peaked, market expectation remains that looser policy there might take some time. As we go through 2024, that could mean underperformance in the world’s largest economy – a reversal of what we have seen for years. If that happens, bond and equity dispersion will be joined by currency volatility. Such volatility makes firm predictions difficult. Looser monetary policy and (in the latter half of the year) an economic recovery in Europe are likely. Beyond that, unfortunately, we can only predict unpredictability.

Outlook for regions

US: The US was indisputably the standout performer this year, with US equities once again outperforming other markets. But the US economy might not be as strong as its global peers in 2024. Partly, this is about starting points; the US has grown more quickly than the rest but that growth did not spread outwards in 2023. Next year could see US demand providing more external support. That past strength is also likely to keep the Fed relatively less accommodative than other central banks (despite investors perceiving a dovish shift in the Fed’s policy following its December 2023 meeting). This could mean underperformance in US markets relative to Europe or even Emerging Markets. Currency volatility may result, perhaps continuing the recent trend of dollar weakness, which is again generally a growth positive for the global economy. There is also the small matter of a presidential election next year, which is likely to bring further spending promises and plenty of political instability. That being said, energy – especially natural gas and electricity – is much cheaper than in Europe and nowhere looks ready to match the depth and dynamism of the US economy.

The US might well become the victim of its own success in 2024. The liquidity from the pandemic period still is yet to be worked off. Meanwhile the lagged impacts from the pandemic-inspired loose fiscal stance are likely to keep the Fed from cutting rates as early as the European Central Bank (ECB) in Europe, even though growth is weakening. Markets seem to have a rosy view of Fed policy at the moment and so could end up disappointed. In our view, interest rates are likely to come down in Europe (and possibly even in the UK) before the US. These factors could bite in the second half of the year. At that point, Fed policy will have sucked up most of the excess liquidity while real disposable income growth may be slowing (possibly as wages growth slows and goods deflation lessens). We may even see the US flirt with recession. If so, currency volatility and, hence, wider market volatility, is likely.

UK: Monetary policy is perhaps the most important part of Britain’s outlook for 2024. Despite the perceived hawkishness of the Bank of England’s Monetary Policy Committee (MPC), we expect interest rates to come down, thanks to inflation finally falling back to target, and rate cuts should be underway by the summer. This will mean falling bond yields and a pick-up in equity valuations. UK equities are notably cheaper than global counterparts on a price-to-earnings basis, reflecting years of neglect by foreign investors. Valuations have plenty of room to climb and – since we expect positive bond market movements – Britain looks good value.

Next year will almost certainly see another General Election (though the latest possible date is January 2025, which is unlikely but cannot be fully ruled out) which, barring an historic turnaround, is likely to deliver a Labour government. Given Keir Starmer’s cautious approach, though, we do not expect this will dramatically change medium-term growth prospects or financial conditions. There are some hopes that trade negotiations with Europe might be improved by a structurally less antagonistic government, but any effect from this will likely be long in the future. Overall, it will likely be slow and steady for UK investors, but starting from a low base will help.

Eurozone: Economic weakness should mean supportive European monetary policy early in 2024. With any luck, and with the global economic tide potentially turning, this could translate into stronger growth in the second half of the year. These cyclical factors, combined with the relative cheapness of European equity versus the US, should mean market outperformance as of late, but risks remain. There is a risk that the European Central Bank (ECB) has overtightened already, throwing the fragile economy into deeper recession than needed. On the other hand, the continent is still recovering from its energy price shock and the fiscal deterioration it brought. We do not think these factors will disrupt what is ultimately a positive story, but we must stay wary.

We expect tight fiscal policy to be a feature of most major regions in 2024, but probably more so in Europe. That only increases the urgency of the ECB’s rate cuts, which are now a matter of when not if. Headline Eurozone inflation has been on a downward path for months. Markets have subsequently brought forward their rate cut expectations to as early as March. And even then, many commentators are suggesting the ECB is once again ‘behind the curve’ on inflation – only this time in reverse. With so much gloom around the Eurozone economy, growth optimism may seem strange. But looser monetary conditions and a recovery in global growth are sure to benefit the Eurozone. European equities are some of the most cyclical there are; the start of a new cycle should serve them well.

Emerging Markets: If our central scenario of a global cyclical recovery and weaker dollar plays out, Emerging Markets (EMs) stand to benefit in 2024. This would be helped by a Chinese economic recovery, particularly if consumers there felt confident again. With the inherent economic and financial risks surrounding the world’s second largest economy, EMs would do well to focus on securing their own prospects. Fortunately, this is already underway, particularly for regions like Brazil that sorted their inflation problems early.

For China, the main question is now not whether Beijing is willing to soften its deleveraging stance and promote growth, but whether it can. Private sector business confidence appears to have plummeted when one looks at market-based indicators. While government borrowing is now rising, private sector borrowing continues to decline.  The recent spike in consumer default numbers, and the weak pricing power for goods exporters, suggests it might not be so easy. Even with central government support, we expect China to radiate disinflation for at least the early parts of 2024.

The green shoots of a global recovery, if and when they show, should boost sentiment around EM assets. But with the global economy in such a precarious position, 2024 will likely be another year where differentiating between EMs is key. 

Outlook for asset classes

Bonds: In line with our expectations for government and central bank policies, we expect bond market dispersion in 2024. Despite ECB President Christine Lagarde indicating a continued bias towards tightening, a mild tightening in fiscal policy, softening wage rises, energy price falls and generally lower inflation should allow interest rates to fall sooner in Europe than in the US. That is likely to mean a widening of the gap between US and European yields in the early part of the year. 

Shifts in the long-term risk premia – how long-term bonds are valued against short rates – have become more prominent in 2023. These have fallen sharply since October, dropping below historic averages. With inflation still lingering, we expect them to move higher in 2024 – primarily in the US. Relative risk valuations will impact credit spreads too, but these have thankfully been resilient. Even though growth is weak (and in some cases negative) investors do not seem to fear widespread bankruptcies or financial instability. That is good, since it will likely mean a ‘buy the dip’ mentality in corporate bond markets.

Equities: We expect global equities to be a tale of two halves, especially in the US. The heavily anticipated global recession – if it comes – will mean stagnant or falling corporate earnings, lowering the base attractiveness of stocks. On the other hand, a lot of that negativity is already priced into current equity values, after global stock markets saw heavy losses in 2022. Investors are tempted to look forward to the cycle after this one – when central banks will loosen policy and growth can start again. Optimists are hopeful about the next cycle, pessimists are still worried about this one, and everyone else is caught in the middle. Markets will likely go back and forth between these two modes until the underlying economic data makes it clear who is right.

The strength of the US equity market, much like its domestic economy, has been unparalleled in recent years. In particular, the outperformance of the US mega caps was stunning in 2023. Share prices for the so-called ‘Magnificent Seven’ – the most highly valued companies in the S&P 500 – increased by more than 70% in response to the generative AI investment craze, while the remaining stocks in the S&P gained just 10%. Whatever the justification for this outperformance, it means the US continues to be more expensive (on a price-to-earnings basis) than anywhere else.
 
Comparatively, British and European stocks are trading at cheap valuations. This is certainly true for the UK, whose attractiveness as an investment destination has been in decline since before Brexit. These, historically relatively cheap valuations are still a little pricey in absolute terms, at least for where interest rates are. But Europe’s rate cuts are effectively confirmed at this point, while we have argued elsewhere that the UK must follow suit. If global growth is stronger than expected, British and European equities stand to benefit.

The rest of the global equity picture is mixed for 2024. In Japan, improvements in corporate structures have gone under the radar in recent years, but it is clear that companies and shareholders are seeing the fruits of structural change. Margins are improving (from admittedly low levels) and Japanese workers are among the cheapest in the world for their skill levels. Any pick-up in exports (which can only come from a global cyclical rebound) will likely have second-round effects on wages and domestic demand, making Japanese stocks a worthwhile bet.

Currencies: Assuming our policy and economic outlook holds up, the US dollar should decline in 2024, but with bouts of volatility in currency markets. The dollar has become undeniably expensive over the last few years – thanks to impressive capital flows into the US – and this process has to stop at some point. There is every reason to think that point will come next year. Even a mild outperformance from outside of the US would likely cause some capital outflow, lowering the dollar’s value. The Japanese yen could be a particular beneficiary – considering its current cheapness on a purchasing power basis.

Commodities: Commodity prices – oil and gas in particular – will probably stay weak into the start of 2024. As the year goes on, though, global growth expectations should shift. Global growth usually means stronger commodity demand, so prices should be supported. But the amount of support depends on many factors, like where growth is expected to come from and in what form. Outside of oil and gas, metals have slowly lost ground – with the exception of iron and steel. This will not turn around until growth recovers, which is unlikely before the middle of 2024.

The biggest demand swing could come from China, whose government has made clear it prioritises consumer demand and building activity. If Beijing keeps revving the economy, prices for commodities in general will be well-supported. In this sense, we should keep an eye on commodity prices, as these could signal a wider recovery.

Property: There is potential for a property rebound in 2024, but whether it happens will depend on policy. The past year has been difficult for residential property, but activity has picked up across the world – even in China’s ailing building sector. This happened after the fall back in long-term bond yields, which suggests current rates are cheap enough to spark building activity. 

Commercial real estate, on the other hand, is still in a clearing phase. The stable, post-pandemic level of demand for retail and office space is not yet clear, while input costs (including insurance) are also in flux. The end of 2023 has seen European real estate investment vehicles come under pressure – a trend that will likely be repeated across the world.

The biggest hope for property prices is government building policy. Next year will see nearly half the world’s population go through elections, and building is an easy sell for most politicians. In multiple regions, we have already seen suggestions of looser planning regulation. This has the potential to unlock substantial amount of growth for the wider economy. Prospective governments might see this as an easy win, considering that many building projects are at least partially funded by private groups, lowering the spending that appears on their balance sheets.

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

Charlotte Clarke

18/12/2023

Please see the below article from Eveleyn Partners detailing their thoughts on today’s Bank of England MPC decision to continue to hold interest rates at 5.25%. Received this afternoon 14/12/2023.

What happened?

The Bank of England (BoE) held the base rate at 5.25% at their meeting today. This was the third consecutive meeting at which they have held rates at this level and was in line with market expectations.

The committee was split in its vote, as it was in November, 6-3, with the three external members of the committee continuing to prefer another 25bps increase.

What does it mean?

Today’s decision by the Bank of England will not come as a surprise to markets.  What is of interest is the tone and rhetoric of the statement today. The Bank maintained its hawkish stance, that rates would need to be “sufficiently restrictive for sufficiently long” and leaving the door open for further tightening should inflationary pressures persist. That contrasted with yesterday’s FOMC statement which took a more dovish tone.

The economic backdrop to today’s meeting remains difficult. The economic data has been mixed since their November meeting, and the while progress on inflation has been made, uncertainty remains around the outlook. CPI inflation has fallen by 2.1% to 4.6%, undershooting the committee’s estimate of 4.8%. In terms of real GDP, October figures showed a 0.3% contraction, which leaves the economy set to undershoot the Banks 0.1% estimate for growth in Q4.

The fiscal backdrop has also changed, with the Chancellor easing policy in the Autumn statement and government suggesting there might be more to come in the Spring Budget, potentially adding inflationary pressure.

After the November MPC meeting, the first cut in interest rates had been priced in for August 2024. Since then, markets have grown increasingly optimistic about the timing of rate cuts – expected in May shortly before today’s meeting and remained little changed immediately after.

Bottom Line

We think the UK economy faces more inflationary challenges than some of its global peers, in particular the US, and would suggest the market for UK rates has been swept up recently in a wave of euphoria over interest cuts coming sooner than previously expected. Our view is that while the direction of travel is correct, there is risk that markets are disappointed when cuts do not come through as quickly as currently priced in.

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

Alex Clare

14/12/2023

Please see the below article from Evelyn Partners detailing their thoughts on the Fed’s decision to continue to hold interest rates at their present level. Received this morning 14/12/2023.

What happened?

The Federal Open Market Committee (FOMC) voted to keep rates on hold at 5.25-5.5% for the third meeting in a row. This marks the end of the US tightening cycle.

What does it mean?

Last night we received some good news from across the pond: the US Federal Reserve signalled that the tightening cycle is over, and it will pivot to easier monetary policy next year.

This signal came via three sources. First, the summary of economic projections, which collates the forecasts of committee members, showed that monetary policy is likely to be easier next year. The projections show that the median expectations for interest rates in 2024 were revised down from 5.1% to 4.6%—a notable move given that the previous forecasts were only submitted 3 months. This change was driven by a major downside surprise in the recent inflation data: the committee now expects core PCE inflation to be around 3.2% for 2023, instead of 3.7%.

Second, the dot plot – which maps the committee’s projections in more detail – also showed a notable decline in interest rates in the coming years.

In response, the Fed funds futures, which capture market-implied future interest rates, moved to price in 6 cuts next year, instead of the 4 expected before the meeting. The Fed isn’t expected to cut at its next meeting in January, but the market then anticipants three consecutive cuts from March to June, and it assigns a high probability of cuts in July and September. 

Third, Chair Powell half-heartedly pushed back against the market’s dovish interpretation of this evidence. He noted that it was “too early to declare victory” but admitted that the committee had been talking about when to cut rates. He also said that the Fed would need to start cutting rates “way before” inflation reached its 2% target. These statements imply the next step will be to cut rates.

Unsurprisingly, markets rallied strongly on this news. The S&P 500 and Nasdaq gained ~+1.4%, while the US 10-year yield fell below 4% having topped 5% as recently as September.

Bottom Line

Last night the US Federal Reserve signalled that the tightening cycle is over, and it will pivot to easier monetary policy next year.

Unsurprisingly, markets rallied strongly on this news. The S&P 500 and Nasdaq gained ~+1.4%, while the US 10-year yield fell below 4% having topped 5% as recently as September.

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

Alex Clare

14/12/2023