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Please see the below article from Evelyn Investment Partners detailing their thoughts on the UK inflation announcement for October. Received this morning 15/11/2023.

What happened?

UK October annual headline CPI inflation was reported at 4.6% (Bloomberg consensus: 4.7%), its lowest pace in 2 years, versus 6.7% in September. In monthly terms, CPI was flat (consensus: +0.1%), compared to a rise of 0.5% in September.

What does it mean?

The downward trend in inflation is continuing following this CPI print. A year on from headline CPI of 11.1% in October 2022, it has since decelerated by over 6% points, with much of that deceleration coming from lower energy prices in the transport (i.e. fuel) and housing and household services (i.e. gas and electricity) categories.

As it stands, Brent crude oil prices are now down slightly for the year despite heightened geopolitical risk in the Middle East and OPEC+ output cuts. This reduces the risk of upside in retail petrol and diesel fuel prices.

Moreover, the drop of the Ofgem regulator price cap has been another driver of lower CPI inflation. The further good news for households is that wholesale natural gas prices have remained low although peak winter demand has yet to come. For the moment, there is no evidence of a sharp acceleration in natural gas (or electricity) prices that could impact future inflation data.

Today’s CPI figure supports the narrative that we have reached the end of the BoE’s rate hike cycle with the base rate at 5.25%. There is conflicting opinion within the Bank of England (BoE) Monetary Policy Committee as to when rate cuts will occur, with the BoE Chief Economist, Huw Pill, hinting at rate cuts sooner than expected. However, BoE governor, Andrew Bailey, downplayed these comments and reiterated the need to reduce inflation to the target level of 2%. The futures’ market expects base rate cuts around the second quarter of 2024.

Bottom Line

The broader trend of inflation deceleration is continuing with the aid of lower energy prices. This suggests that we have peaked in interest rates and that cuts are to be expected in 2024.

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

Alex Clare

15/11/2023

Please see today’s Brooks Macdonald’s Daily Investment Bulletin received this morning:

What has happened

Monday saw somewhat of a lull for equity and bond markets with investors awaiting today’s US CPI report before making any decisive moves. There was a modest recovery in Brent Crude oil prices after the declines of recent weeks, leading energy to be one of the best performing equity sectors on the day. European equities, which had missed out on some of Friday’s rally in US markets which took place after the European close, climbed three quarters of a percentage point.

UK

The UK saw a significant shakeup in senior cabinet staff yesterday after the removal of Suella Braverman as Home Secretary. That role will be replaced by James Cleverly alongside the eye-catching return of David Cameron (via the House of Lords) to government through the role of Foreign Secretary. Today sees the latest UK employment data which has been the subject of a review by the ONS after being delayed last month due to worries over its statistical quality. Average Weekly Earnings dipped slightly but the reading including bonuses was far stickier than markets were expecting, which will keep the pressure up on the Bank of England.

US CPI

Today’s main event will undoubtedly be the US CPI release which comes at 1:30 pm UK time. The market is expecting a headline month-on-month growth of 0.1% and for that to bring the year-on-year reading down from 3.7% to 3.3%. The core reading however is expected to remain sticky, at 0.3% month-on-month, which keeps the annual number at 4.1%. Stubborn core inflation will be an unhelpful narrative for the Federal Reserve to deal with as it seeks to strike a balance between economic and inflation risks.

What does Brooks Macdonald think

Inflation has clearly fallen significantly since its peaks however the risk now is that US inflation now settles at an elevated level and proves difficult to shift. The demand side of inflation has been far more resilient than most economists believed, with excess savings supercharging consumption over the last 3 years. Should this still have further to run, the Fed may be forced to consider further interest rate hikes even though the recent tightening of monetary policy is yet to fully run its course through the US economy.

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  

14/11/2023

Please see the below article from Tatton Investment Management providing a brief analysis of markets and the key news from global economies over the past week. Received this morning 13/11/2023.

Overview: Back-pedalling central bankers

The turnaround rally in stock and bond markets – prompted by dovish central bank comments – petered out towards the end of last week, with central bankers at pains to reverse their messaging, or at least reaffirm their commitment to keeping rates high for as long as it takes to get inflation back to their 2% target.

This comes against the backdrop of seemingly having passed through the peak in nominal growth (real growth + inflation) and are now heading back down to more normal levels. In most cycles we would expect to see real growth become negative for a time while inflation starts to undershoot central bank targets. That normally means contraction of economic activity (aka a recession). What matters for capital markets is the depth and pace of the downswing. The increased uncertainty heightens the likelihood that banks, investors and other intermediaries in the financial system respond to rising risks and uncertainty by pulling their liquidity prematurely. This in itself creates the downswing in both markets and economies (of course, if it happens, no bank or investor would say they were premature).

This therefore constitutes the point of greatest danger for a policy error by central banks. Indeed, because we start from such elevated inflation levels, there is a lot more uncertainty about where we are in this trajectory. But despite most central bank policymakers reiterating that rates will remain restrictive, investors now think the tail risks of higher rates and therefore a policy error have diminished. Whether it’s the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the discussions are acknowledging that rate rises are almost certainly over for now and that cuts are on the cards.

This week brings the release of provisional inflation data, which feels even more important in the current environment. UK consumer prices rises are expected to have fallen back to 4.7% year-on-year, which should allow Prime Minister Rishi Sunak to claim a victory in his inflation pledge (to halve inflation from December 2022’s +10.5%). That will be less important than the signal it might send about the chances of rate cuts in the second half of 2024.

Bank of England giving and receiving mixed messages

When the BoE kept interest rates on hold last week, Governor Andrew Bailey told reporters it was too early to talk about cutting rates. But last Tuesday, BoE chief economist and fellow Monetary Policy Committee (MPC) member Huw Pill was quoted saying market expectations of an interest rate cut next year are not “unreasonable”. Bailey and Pill are realistically outlining the same view on the economy, but tone can make a world of difference to avid central bank watchers. In fairness to the MPC though, if their policy guidance is confusing, it is probably because the UK economy appears rather fickle – with  growth oscillating from slight positive to slight negative, while prices continue to rise.

Markets tend to dislike the uncertainty of mixed messages but rather like the prospect of easier monetary policy. However, the labour market situation is more complicated than it appears. The MPC’s estimates of how jobs might respond to their policies are hampered by the fact that the reliability of the available data has become less than ideal for making that call. For the headline unemployment rate published by the Office for National Statistics (ONS), this is well known, since it only comes out after a significant delay and so offers at best an indication of how things were five or six months ago. But the household, company and tax data used for the more up to date job market assessment has since the pandemic also become far less reliable than it used to be.

UK year-on-year inflation is still high in both absolute and relative terms, so it makes sense for Bailey to silence any dovish noises, but of course the Governor has had to bear the brunt of the public’s ire over the cost-of-living crisis. No doubt, his speeches will continue to insist that the BoE decisions are dependent on incoming data. The problem is that being dependent on the data from the main official sources means “behind the curve”. We think they will not be so hidebound.

Europe’s natural gas on a bumpy road down

European gas supplies officially reached 100% of storage capacity at the beginning of November. This is a far cry from the fears of last year, when Russia’s war in Ukraine decimated Europe’s energy supplies and policymakers planned for rolling blackouts. Policy choices have obviously played a big part. The immediate priority was finding other short-term sources, exemplified by the massive increase in imports of liquified natural gas (LNG), but structural changes for the medium and long term have been aggressively pursued too. Strict storage build targets are part of it, helped by moves to limit household and business energy consumption – particularly in Germany – thanks in part to an unusually mild winter. Less remarked on has been the increase in storage capacity itself, although this slow process has not yet had a massive impact at the aggregate supply level.

The biggest structural push, over the longer term at least, has been to ween Europe off natural gas altogether. But even if the EU’s long-term energy security and environmental ambitions both point towards renewables, politicians are well aware that gas will be needed for the foreseeable future. Pipelines to alternative suppliers are being built, and there has been a marked increase in LNG inflows. Recognition of this need is perhaps why wholesale gas prices have not fallen further. Reserves were still above a reassuring 60% of capacity at the start of spring – the seasonal low point for reserves – and the build has been ahead of schedule ever since, but European gas and energy prices are still high by historical levels. This is despite weak demand on the continent, both current and projected.

Even with abundant supplies, the technologies for transporting or using them are not very flexible. This is fine if we can plan for periods of supply-demand imbalance, but the last few years have shown that the best laid plans go awry. For example, even with gas supplies filling up all available tanks, Europe is estimated to have at most two months of required gas for the winter. Two months spare should be more than enough, but further complications could always come about. The brittle nature of energy markets means that prices will likely remain volatility, even if the general trend is downward.

Still, a slow downward path will be good for European businesses and households. But unfortunately, this improvement in absolute terms is unlikely to give much benefit in relative terms. For one thing, the current oversupply is largely down to weak economic demand – hardly a good sign for the near future.

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

Alex Clare

13/11/2023

Please see the below article from Evelyn Partners for their thoughts on the UK Q3 2023 GDP announcement:

What happened?

UK real gross domestic product (GDP) neither grew nor contracted in the third quarter with the headline quarter-on-quarter (QoQ) GDP growth rate estimated at 0.0% for Q3. This was better than had been expected by the median estimate among economists, of a 0.1% contraction. However, the growth picture was weaker than in the second quarter of 2023, when the economy expanded by a modest 0.2% QoQ.

What does it mean?

The UK economy managed to dodge a contraction in the third quarter, just edging out the 0.1% contraction that has been forecasted by economists, to instead show no growth for the quarter. This was driven by September’s monthly growth data which at 0.2%, was ahead of the expected flat growth forecast for the month. This means the UK economy is not yet teetering on the verge of a technical recession, which is defined as two consecutive quarters of negative GDP growth. On a year-on-year basis the UK economy has expanded by 0.6% over the last 12 months.

Despite a strong start to the first half of the year, consumption has now started to wane, with the sector contributing -0.2 percentage points to the QoQ real GDP figure. Within this, retail sales contracted by near 1% QoQ with consumer facing services contracting by a more pronounced 3%. Higher interest rates have likely weighed on discretionary spending over the summer, prompting a deterioration in consumer confidence. Further evidence of higher rates filtering through into the real economy could be seen from residential investment which fell 1.7% QoQ marking its fourth consecutive quarterly decline.

Government spending also weighed negatively on the quarterly growth rate, contributing -0.1 percentage points. Real government consumption expenditure fell by 0.5% in the third quarter following an increase of 2.5% in the previous quarter. The fall in government consumption in the latest quarter mainly reflects lower spending on health and on education, which fell by 1.4% and 0.3%, respectively.

A bright spot came from net trade, which contributed 0.4 percentage points to the QoQ rate. Export volumes increased by 0.5% in the third quarter, following a fall of 0.9% in the second quarter. The increase was driven by a 2.8% rise in services exports, which offset a fall of 2.0% in goods exports. Import volumes fell by 0.8% in the third quarter. This decline was driven by a 3.5% fall in goods imports, which offset a 4.2% increase in services imports.

Similarly, inventories remained a positive contributor to the headline figure, as it has now for four consecutive quarters, adding 0.2 percentage points to the QoQ growth figure.

Looking ahead:

The lagged impacts of tight monetary policy are beginning to impact the UK economy, as the cost of capital increase, households will experience a reduction in disposable incomes as aggregate mortgage payments tick up. However, as the labour market remains tight with unemployment at near recent lows and wage growth remaining elevated, this should act as a partial buffer for any downside potential on consumption heading into Q4 and into next year.

Although the BoE have seemingly paused on interest rates with markets pricing in only a ~20% chance of one more hike over the next three meetings, it does not mean rate cuts are on the immediate horizon. However, BoE chief economist Huw Pill recently hinted at rate cuts materialising sooner than participants expected. With the economic growth picture deteriorating and inflation starting to come under control it could prompt the BoE to cut rates as soon as Mid 2024.

Bottom Line

With the UK economy managing to avoid contraction in the third quarter the risks of an imminent technical recession have been delayed for now. However, as the impact of higher interest rates continue to put the brakes on consumption, the resulting drag on the real economy could lead to negative economic growth in the coming quarters which might prompt the BoE to cut rates sooner than expected.

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

Andrew Lloyd DipPFS

10/11/2023

Please see below, Brooks Macdonald’s Daily Investment Bulletin received this morning – 09/11/2023.

What has happened

US equities managed to deliver a small gain yesterday, marking the 8th consecutive day of gains, as the bond rally continued. Further falls in the oil price also helped support the view that inflation would come down quickly, with Brent Crude closing below $80 per barrel for the first time since July. In terms of the bond rally, the US 10-year Treasury yield fell below 4.5% after the bond market absorbed a fresh $40bn 10-year Treasury auction, raising hopes that the current level of supply would not destabilise the rally.

Bond market rally

The recent fall in bond yields is already following through to US mortgage pricing with the average 30-year mortgage rate down 0.25% over the last week alone. The overall rate remains above 7.5% however so we are by no means back to ‘cheap’ borrowing even if the path of travel is to be welcomed. Mortgage applications rose as a result but remain subdued versus recent history. Fed Chair Powell will today speak at a panel at the IMF conference so he may shine some additional light on current Fed thinking post the last week’s moves. Over in Europe, sovereign bonds also rallied despite prominent ECB bankers stressing that it was ‘far too early’ to be talking about cutting Euro Area interest rates.

Inflation

The fall in energy prices yesterday helped lower market expectations for inflation with medium term Euro Area inflation expectations falling to one of their lowest levels in six months. The energy moves were not limited to just the oil price with European natural gas prices falling. Reflecting concerns about the resilience of global demand, the highly economically sensitive copper price also fell yesterday.

What does Brooks Macdonald think

While the market has been quick to price in an improving inflation backdrop within Europe, consumer surveys still point to higher expectations. The ECB’s Consumer Expectations Survey is published with a significant lag, so reflects thinking in September but at that point, 1 year inflation expectations increased by 0.5% month-on-month to 4%. Falling energy prices should start to filter through to expectations over the coming months however the ECB will need to see a shift in consumer mindset in order to entertain any thoughts of a rate cut in 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.

Charlotte Clarke

09/11/2023

Please see below, Brooks Macdonald’s Daily Investment Bulletin which outlines the key factors currently affecting global markets. Received this morning – 07/11/2023

What has happened?

There was a bit of pushback against last week’s hopes of peak US interest rates and imminent cuts yesterday. The bond pressure was particularly acute in shorter dated bonds with the 2-year US Treasury yield rising by almost 10bps. Despite these moves, the US equity market managed to stay in positive territory for the day however below the surface, the US small cap index suffered under the weight of rising yields.

Central banks

Market expectations for a Fed interest rate hike rose slightly yesterday as did expectations of the central bank’s rate at the end of 2024. One of the drivers behind this was commentary from the Minneapolis Fed’s Kashkari who is one of the more hawkish members of the central bank. Kashkari said that ‘we need to let the data keep coming to us to see if we really have got the inflation genie back in the bottle’. A warning against declaring victory too early. On that note, the Reserve Bank of Australia lifted its cash rate yesterday in response to a slower-than-expected decline in inflation.

Lending conditions

The Senior Loan Officer Opinion Survey (SLOOS) from the Federal Reserve also captured the market’s attention. The survey is an important barometer of lending standards and therefore by extension the difficulty, or ease, of obtaining credit in the US economy. The survey showed some improvement in US banks’ willingness to lend however mortgage availability remained poor with the lending standards actually tightening for that component. While there was some improvement within the survey, the tight standards are still at levels previously associated with a recession.

What does Brooks Macdonald think?

The improved SLOOS data yesterday helps support an improving economic narrative however the standards, in aggregate, act as a break on the US economy. Should this tightness continue, it raises the risk of a hard economic landing. Until these lending standards ease, companies that have significant walls of upcoming bond or loan maturities, and therefore need to refinance, will find themselves at a material disadvantage to those who have secured longer term financing.

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

Alex Kitteringham

7^th November 2023