Market Commentary 20th November 2023 – from Charlie Hancock

Consumer price inflation in the UK slowed by more than expected in October, falling to 4.6% from the 6.7% recorded for September. The steeper than expected drop in inflation cast some doubts on how long the Bank of England (BoE) will keep interest rates at current levels, with expectations for interest rate cuts in 2024 rising.

Data on the UK labour market showed that wage growth eased slightly during the third quarter, but remained relatively high with a 7.7% average annual increase. The unemployment rate remained unchanged from the 2^nd quarter at 4.2%, whilst more recent data from HMRC showed that the number of employees on payrolls increased by 0.1% October.

A final estimate for inflation in the Eurozone confirmed that the annual rate of consumer price increases eased to 2.9% in October from 4.3% in September. After a series of other data releases which indicated that the Eurozone economy continues to slow and may already be in recession, last week saw rising expectations for the European Central Bank (ECB) to begin easing monetary policy.

ECB officials appeared keen to emphasise that they intend to keep interest rates on hold for the foreseeable future. The central bank’s Vice President, Luis de Guindos, stated that monetary policy would be kept at a sufficiently restrictive level for “as long as necessary to bring inflation back to target”.

Data released on Tuesday showed that Consumer Price Inflation in October remained unchanged from the 3.2% recorded for September. Core inflation, excluding food and energy costs, came in lower than expected, with a month-on-month increase of 0.2% and an annual increase of 4.0%. The core inflation rate was the lowest level recorded since September 2021.

Investors paid close attention to retail sales data which showed a decline of 0.1% in October. The drop in retail sales was the first since March 2023 and suggested that consumer finances have weakened.

Further evidence of the US consumer coming under pressure came via the week’s earnings reports. Retail giant Target reported that sales declined by 4.9% in the third quarter and warned that they expect further weakness in the upcoming holiday season. The do-it-yourself chain, Home Depot, reported a 3.1% decline in sales during the third quarter, whilst Walmart stated that customers have been reducing spending on discretionary purchases.

US-China relations appeared to improve during the week, with President Xi visiting the US for the first time since 2017. Xi and President Biden reportedly had a progressive meeting and agreed to better manage tensions between the two nations in the future. Xi also hosted a dinner event with chief executives from some of the largest businesses in the US, including Apple and BlackRock. Chinese economic data was mixed, with consumer spending and industrial activity rising by more than expected during October, whilst the property market remained in the doldrums with investment into real estate assets continuing to decline.

Japanese economic growth data came in weaker than expected, with Gross Domestic Product (GDP) falling at an annualised rate of 2.1% in the third quarter versus expectations for a decline of 0.6%. The increase in GDP during the second quarter was revised lower. The data suggests that the Japanese economy remains on uncertain ground and did appear to support the ultra loose monetary policy stance taken by the Bank of Japan (BoJ).

A record amount of orders for a new Gilt maturing in 2043 also appeared to support the decline in yields, with the auction showing that investor demand for fixed income assets is strong.

GBP / EUR – Current 1.1420 Previous 1.1439

The Pound gained 1.87% against the US Dollar last week, with increasing investor confidence coinciding with weakness in the ‘safe haven’ US Dollar. Against the Euro, the Pound declined by 0.17%.