Market Commentary 6th November 2023 – from Charlie Hancock

The Bank of England (BoE)’s monetary policy committee voted 6 to 3 to keep interest rates on hold at 5.25%. The central bank’s governor, Andrew Bailey, expressed that interest rates would be kept on hold for some time, stating that “it is much too early to be thinking about rate cuts”. The BoE stated that there is a 50-50 chance of a recession by mid-2024.

The BoE also published data showing that the number of mortgage approvals during September for new house purchases fell to a 9 month low, pointing to weak sentiment in the housing market. The number of approvals for remortgages declined to the lowest level since January 1999.  Mortgage lender Nationwide reported that house prices rose by 0.9% in October, however, prices were 3.3% lower than during the same period in 2022.

Investors paid close attention to Eurozone inflation data, which showed that the annual rate of consumer price inflation (CPI) slowed to 2.9% in October, reaching the lowest level seen since July 2021. The CPI print was softer than expected, with the European Union’s statistics agency citing a fall in energy and food costs as the main drivers.

Other data showed that the Eurozone economy shrank by 0.1% in the third quarter. Concerns around the Eurozone entering recession, together with the bigger than expected fall in the rate of inflation, contributed to diminishing expectations for any further rate hikes by the European Central Bank (ECB).

Sentiment amongst investors appeared to improve as a result of growing hopes for the US to experience a ‘soft landing’, where inflation falls back to 2% and the economy avoids a recession. As a result, the major equity indices clawed back some ground after a period of prolonged weakness, with the S&P 500 declining by 10% between the end of July and the end of October.

The Federal Reserve kept interest rates on hold following their policy meeting last week. The Fed chair, Jerome Powell, stated during the post meeting press conference that the central bank is aiming to proceed carefully and acknowledged that the US economy is yet to feel the full effects of prior interest rate increases.

Last week also saw a series of data releases regarding the US labour market. Average hourly earnings increased by less than expected during October, leaving year-on-year wage growth at 4.1%. A report released on Friday showed the US economy added 150,000 jobs to payrolls during October, which was weaker than expected. The data release also included downward revisions to the payroll numbers posted for September and August, with a total of 101,000 jobs shaved off the original estimates.

Hopes for a strong economic recovery in China faded following the release of purchasing managers’ index (PMI) data. The manufacturing sector fell back into contractionary territory during October, whilst the data for the services sector came in significantly below expectations and signalled very muted growth. The property market continued to experience significant weakness, with new home sales declining by 27.5% year-on-year.

The Bank of Japan (BoJ) tweaked their yield curve control programme following their policy meeting, with the ceiling for the 10-Year Japanese government bond yield of 1% changed to a “reference” that the central bank will use, rather than a strict cap. The Japanese government unveiled highly anticipated plans for a $110 billion (16.5 trillion Yen) fiscal stimulus package, which aims to boost economic growth and help ease cost of living pressures for poorer households. The measures include income and property tax cuts, as well as wage supplements for low earners.

GBP / EUR – Current 1.1539 Previous 1.1474

The Pound gained 2.13% against the US Dollar, with the safe haven of the US greenback appearing less attractive to investors as risk appetite grew during the week. Against the Euro, the Pound saw a more muted gain of 0.57%.