Market Commentary 18th December 2023 – from Charlie Hancock

The Bank of England’s monetary policy committee voted to keep the base rate on hold at 5.25%, with the central bank stating that interest rates would “need to be kept high for an extended period of time”. The BoE’s governor, Andrew Bailey, told reporters that there is still some way to go until inflation is back at 2%.

Data from the Office for National Statistics (ONS) showed that the UK economy shrank by 0.3% in October. The data came in worse than expected, with economists anticipating that the size of the economy would be unchanged for the month. The weak economic momentum was felt across the economy, with services, construction and manufacturing all experiencing a decline in activity.

The European Central Bank (ECB) voted to keep their key interest rate at 4.00%, with the ECB’s President, Christine Lagarde, telling reporters that there is “still work to be done” regarding inflation. The central bank predicts that inflation will decline gradually before reaching their 2% target in 2025 and, whilst economic growth is expected to weaken, the ECB is not forecasting a Eurozone recession.

An early estimate for a Eurozone Purchasing Managers’ Index (PMI) showed that business activity is likely to decline in December, which may mean that the Eurozone has tipped into recession, given that the economy shrank by 0.1% in the 3^rd quarter of 2023.

The Consumer Price Index (CPI) in the US showed annual inflation was 3.1% in November, in line with economist estimates. Producer Price Inflation (PPI), which measures output prices from the producers of goods and services, rose at the slowest pace since January 2021 with annual inflation of 2.0%.

The Federal Reserve indicated that interest rates are likely to see bigger cuts in 2024 than their previous forecast suggested. The Fed Chair, Jerome Powell, told reporters that the Fed discussed rate cuts at their policy meeting, but they left the possibility of a further hike on the table, should incoming economic data call for it. The central bank believes the US economy will achieve a ‘soft landing’, with their forecasts showing unemployment rising only slightly over the next several years.

Stimulus efforts were ramped up by authorities in Beijing last week, with the People’s Bank of China (PBOC) providing funds to commercial lenders to try and boost lending to businesses. Requirements for minimum house deposits in Beijing and Shanghai were also loosened to try and stimulate the sluggish property market. Meanwhile, economic data showed that the recovery remained fragile in November. Retail sales came in weaker than expected, whilst investment in property declined. House prices declined for the 6^th consecutive month, with the decline for existing homes of 0.80% marking the steepest monthly decline since October 2014.

PMI data for Japan indicated that the economy is likely to expand in December. The data for the manufacturing sector was weak, but a rise in activity for service businesses helped to offset this. Headlines in Japan were dominated by updates on a scandal involving the ruling Liberal Democratic Party (LDP). It is alleged that some members of the LDP failed to declare 500 million Yen (£2.8m) from fundraising efforts over a period of 5 years. The Prime Minister’s approval rating has declined as a result of the allegations.

Whilst the Bank of England (BoE) indicated that rates are likely to be kept on hold in the coming months, fixed income traders moved to price in a greater chance of cuts amidst the week’s gloomy economic data.

Data indicating that economic growth has ground to a halt in the Eurozone appeared to put downward pressure on Eurozone government bond yields, with investors anticipating that the current interest rates set by the ECB will not be maintained in 2024.

The week’s CPI data and comments from Fed Chair, Jerome Powell, contributed to the move in yields, with fixed income markets appearing convinced that the Federal Reserve will begin cutting interest rates in the first quarter of 2024.

GBP / EUR – Current 1.1637 Previous 1.1657

The Pound gained 1.05% against the US Dollar last week, which was primarily due to the greenback weakening against most major currencies. Against the Euro, the Pound fell by 0.17%.