Market Commentary 4th December 2023 – from Charlie Hancock

Strong gains in heavyweight mining stocks helped to lift the FTSE 100 index, with Rio Tinto and Anglo American rising by 2.06% and 4.26% respectively. Utility companies also outperformed the broader market, with National Grid gaining 2.33% and Centrica rising by 2.94%.

The governor of the Bank of England (BoE), Andrew Bailey, pushed back against speculation that interest rates will be cut in the coming months, stating that the central bank “is not in a place where we can discuss cutting interest rates”. Bailey maintained that the BoE “will do what it takes” to reduce inflation to the 2% target.

Data released on Thursday showed that inflation in the Eurozone slowed by more than expected during November, with the year-on-year increase in the Consumer Price Index (CPI) coming in at 2.4% versus expectations for an increase of 2.7%. The slowdown from October’s 2.9% inflation rate pointed to further weakness developing across the Eurozone economy. Core inflation, excluding food and energy prices, slowed to 3.6%.

Despite some analysts suggesting the data could prompt the European Central Bank (ECB) to cut interest rates as soon as the first quarter of 2024, ECB officials pushed back against expectations for any rate cuts in the coming months. The central bank’s president, Christine Lagarde, stated that it was “not the time to start declaring victory”, citing strong wage increases as a reason to remain concerned about inflation.

Investors paid close attention to comments from Federal Reserve officials during the week, as well as a data release for the Fed’s preferred measure of inflation, the personal consumption expenditure (PCE) index.

Core PCE inflation came in at 3.5% year-on-year during October, however, the month-on-month increase of 0.2% showed that inflationary pressures have significantly faded in recent months. The data prompted investors to price in a higher chance of the Fed cutting interest rates in the first half of 2024.

Comments from a senior Fed official, Christopher Waller, appeared to support expectations for interest rates to be cut next year. Waller stated that the fall in inflation is the most rapid decline on record and that “policy is currently well positioned to slow the economy and get inflation back to 2%”. Waller reportedly added that if inflation continued to moderate in the next 3 to 5 months, the central bank could start lowering interest rates. Fed Chair, Jerome Powell, attempted to calm market expectations later in the week, acknowledging that interest rates were “well into restrictive territory” but stressing that incoming data could prompt the Fed to hike rates again.

Chinese property development giant, Evergrande, made headlines again last week. Some of the company’s creditors were reportedly seeking equity stakes in the business as part of a restructuring deal. Evergrande are due to face a liquidation order if they cannot agree a deal with their creditors.

Jack Ma, the founder of e-commerce giant Alibaba, returned to the fore at the company after a long period of absence. Ma reportedly told employees that the business needs to “correct its course”. Ma also warned employees that rival Pinduoduo have been taking market share from the company, but stated that he believes Alibaba can return to their success of the past. Alibaba’s US listed shares declined by 5.78% across the week.

The Bank of Japan (BoJ) appeared keen to push back against speculation that interest rates may rise in the near future. Several senior officials at the central bank made dovish comments during the week, citing concerns that inflation may fall back below the central bank’s 2% target. The comments came despite data showing that producer price inflation was higher than expected in October, with a year-on-year increase of 2.3%.

Bond traders shrugged off comments from the governor of the Bank of England. Fixed income markets appeared to be focussed on the potential for further economic weakness, which could drive the BoE to cut interest rates.

GBP / EUR – Current 1.1680 Previous 1.1525

The Pound had a relatively strong week, gaining 0.85% against the US Dollar and 1.35% against the Euro. UK government bond yields fell considerably less than US or Eurozone government bond yields during the week, which contributed to currency strength for the UK.