Market Commentary 23rd September 2024 – from Charlie Hancock

Inflation data showed that consumer prices rose by 2.2% year-on-year in August, with the headline rate of inflation therefore unchanged from July. Core inflation, which excludes energy and food prices, accelerated from 3.3% in July to 3.6% in August. Meanwhile, a closely watched measure of consumer confidence saw a sharp decline this month, with consumers reportedly worried about policy changes in the upcoming government budget.

The Bank of England (BoE)’s monetary policy committee voted to keep interest rates on hold at 5% following their September meeting. The central bank hinted that further interest rate cuts are likely in the coming months, however, the bank’s governor, Andrew Bailey, warned that the BoE must be careful not to cut “too fast or by too much”.

It was a quiet week for Eurozone economic data, however, investors paid close attention to comments from European Central Bank (ECB) officials, following the central bank’s decision to cut interest rates by 0.25% during the previous week.

The president of the Bundesbank, Joachim Nagel, stated during a speech last week that the ECB must remain patient and wait for inflation to “fully reach the 2% target”. Nagel added that borrowing costs will “certainly not go down as quickly and sharply as they went up”. The comments followed similar remarks from the ECB’s president, Christine Lagarde, who indicated that the central bank is likely to wait until December before implementing a further rate cut.

The Federal Reserve’s policy meeting and announcement of a 0.50% interest rate cut dominated the business press last week. The market reaction was relatively muted, with the rate cut widely expected heading into the week. The Fed stated that it was confident of inflation “moving sustainability” towards their 2% target, with chairman Jerome Powell leaving the door open for further cuts in the coming months.

Economic data was mixed. Retail sales rose by more than expected in August, whilst weekly jobless claims came in lower than expected. Existing home sales were forecast to rise last month amidst a decline in mortgage interest rates, however, data released on Thursday showed that pending home sales declined by 2.5% in August.

Economic data in China indicated that growth remains weak. The urban unemployment rate rose to a 6-month high during August (5.3%), whilst industrial output growth fell to the weakest level in 5 months. Retail sales growth was weaker than expected in August, whilst new home prices continued to decline. The data prompted renewed calls for Beijing to ramp up stimulus efforts.

The Bank of Japan (BoJ) left key interest rates on hold following their policy meeting last week. The central bank have repeatedly stated that interest rates are likely to rise from current levels if the bank’s forecasts for sustained inflation are met. The BoJ’s governor, Kazuo Ueda, stated last week that their optimism on the inflation and growth outlook had been “partially offset” by uncertainty over the economic outlook in the US.

UK government bond yields moved higher amidst the BoE’s decision to keep interest rates on hold.

Comments from ECB officials, who signalled that further rate cuts are unlikely before their December policy meeting, appeared to contribute to Eurozone government bond yields moving higher.

The Federal Reserve’s decision to cut interest rates was widely expected by investors, with the market reaction following the announcement being relatively subdued. Fed chair Jerome Powell indicated that the central bank was paying close attention to labour market data, acknowledging that the jobs market had slowed and adding that the central bank did not “seek or welcome further cooling”.

GBP / EUR – Current 1.1934 Previous 1.1850

The BoE’s decision to keep interest rates on hold at 5%, whilst the Federal Reserve implemented a 0.50% rate cut, contributed to the Pound moving higher last week. Against the US Dollar, the Pound rose by 0.93%. Against the Euro, the Pound moved 0.71% higher.