Market Commentary 13th November 2023 – from Will Binks

The Office for National Statistics reported that the UK economy is estimated to have stagnated over the third quarter of 2023. The services sector cited a fall in output as household spending fell. Businesses across various sectors also noted a fall in investment across the past three months as high inflation and interest rates weigh on consumer activity and lending.

Although September’s data was better than expected and the UK economy avoided a technical recession, high interest rates continue to impact lending and investor activity across the economy.

German Consumer Price Inflation slowed to 3.8% year-on-year in October 2023, from 4.5% the month before. This marks the lowest level recorded in over two years as food inflation eased to the lowest level since February 2022. The core measure of inflation, which excludes food and energy, slowed to 4.3% from the 4.6% rise in September.

The European Central Bank (ECB) President, Christine Lagarde, said in a speech on Friday that interest rates are now at a level that should bring inflation back down to their 2% target. This comes after a string of dovish comments from ECB officials and investors expect their next move to be a cut.

The number of Americans filing for unemployment benefits eased to 217,000 last week. At the same time, continuing claims rose by 22,000 to 1,834,000, the highest since April, suggesting that the unemployed are having greater difficulties finding employment. These latest figures are in line with recent data and comments from the Federal Reserve indicating that the US labour market is weakening.

The Federal Reserve Chairman, Jerome Powell, stated following a press conference last week that “Monetary policy is generally working the way we think it should work”.  Investors and markets are largely convinced that the Fed is done with hiking interest rates, and their next move will be a cut from the current level.

The Chinese government are facing further challenges in its efforts to boost domestic consumption and revive the country’s economy, as deflation persists. A closely watched data release on foreign direct investment showed an outflow of $11.8 billion in the third quarter of 2023, the first contraction since records began in 1998. According to recent data, the year-on-year CPI inflation rate for October was -0.2%.

The Governor of the Bank of Japan, Kazuo Ueda, has maintained that Japan is making progress to reach its 2% inflation target, thanks to the increase in wages and demand-driven inflation. However, there is still more work to be done. To encourage consumer spending, the Japanese government is providing tax cuts and rebates to households.

The chief economist of the Bank of England, Huw Pill, gave mixed messages about interest rates. On Tuesday, he stated that interest rate cuts from early next year were not “totally unreasonable”. However, on Thursday, he contradicted his earlier statement by stating that the rates would have to continue to remain restrictive.

European Central Bank President, Christine Lagarde, emphasized the commitment to maintaining rates at their current level for at least several quarters to bring inflation back to the 2% target.

The labour market that appears to be softening after months of unexpectedly strong data appears to have had an impact on bond yields in the US in recent weeks.

GBP / EUR – Current 1.1439 Previous 1.1539

The Pound fell by 1.26% and 0.86% against the US Dollar and Euro respectively last week. The Pound fell against major currencies last week as expectations for rate cuts in the nation rise for 2024.