Market Commentary 23rd October 2023 – from Charlie Hancock

UK Consumer Price Index (CPI) data for September showed that the rate of inflation remained unchanged from August’s 6.7%. Rising fuel prices contributed to the monthly print coming in slightly above expectations. Inflation in some categories subsided significantly, with food prices seeing a small monthly decline for the first time since September 2021. Economists currently expect the annual increase in CPI will fall to around 5% for October, largely as a result of the most recent price cap on energy bills.

The Bank of England (BoE)’s chief economist, Huw Pill, stated last week that the central bank has “more work to do” to ensure inflation returns to their 2% target. Pill added that the war between Israel and Hamas will have to be considered at their upcoming November policy meeting, with the potential impact on oil prices being an important factor.

A number of disappointing earnings results from European companies contributed to the declines in European equity indices. Dutch chipmaking company ASML released a disappointing 3rd quarter earnings report and warned that revenue growth could be flat in 2024. Swedish engineering giant ABB posted earnings broadly in line with expectations, but warned of a slowdown for the 4^th quarter amidst declining revenues from China.

Policymakers from the European Central Bank (ECB) delivered relatively hawkish remarks, with the central bank’s president, Christine Lagarde, warning that inflation in the Eurozone “is still strong” and wage growth is “historically high”. The ECB’s chief economist, Philip Lane, told reporters that the central bank may need to wait until spring 2024 before they can be confident that inflation is returning to their 2% target.

Economic data contributed to expectations for interest rates to remain ‘higher for longer’. Retail sales came in stronger than expected for October, whilst weekly jobless claims were lower than expected. Data for the property market was not as positive, with building permits declining sharply during September.

Comments from Federal Reserve officials also contributed to the concerns about interest rates remaining high. The chair of the Fed, Jerome Powell, stated that he “saw no signs that the current stance of Fed policy would push the economy into a recession”.

Economic growth in China for the 3^rd quarter came in stronger than expected, with year-on-year Gross Domestic Product (GDP) growth of 4.9%. Stronger than anticipated retail sales and industrial production helped to offset weakness in the real estate sector. Concerns about a potential default by property developer Country Garden weighed on investor sentiment during the week, with the heavily indebted firm being one of the largest developers in China.

Investors paid close attention to inflation data in Japan last week. The core consumer price index (CPI) rose by 2.8% year-on-year in September, with inflationary pressures cooling from the 3.1% recorded for August. The data did little to ease the uncertainty regarding the outlook for Bank of Japan (BoJ) monetary policy. The Japanese yen continued to weaken, prompting the government to re-iterate that it is prepared to intervene in foreign exchange markets.

Hawkish comments from the BoE and stubborn inflation in September added to expectations for interest rates to remain on hold in the coming months.

Hawkish comments from ECB officials contributed to the rise in yields, with the president of the Bundesbank, Joachim Nagel, stating that price pressures are “too high” and that upside risks to the inflation outlook remain present.

GBP / EUR – Current 1.1482 Previous 1.1556

The Pound gained 0.17% against the US Dollar, with the greenback giving up some of the recent gains it has seen against most major currencies. Against the Euro, the Pound fell by 0.64%.