Market Commentary 16th September 2024 – from Charlie Hancock

Economic data for the UK was worse than expected. Data from the Office for National Statistics (ONS) showed that growth in the UK stagnated for the second consecutive month during July, with Gross Domestic Product (GDP) seeing zero change for the month. The ONS also published data showing that the number of employees on UK payrolls declined during August.

Wage growth data showed that the average rise in pay slowed in the three months to July. Average earnings rose by 5.4%, which was in line with economist estimates. The Bank of England (BoE) are reportedly hoping for signs of slowing wage growth, given their concerns about the possibility of inflation accelerating due to strong pay increases.

A closely watched survey for Eurozone investor confidence declined this month. The firm responsible for the survey stated that the Eurozone is struggling with “recessionary tendencies”, citing weakness in Germany as a key driver.

The European Central Bank (ECB) cut interest rates at their September policy meeting, taking their headline interest rate from 3.75% to 3.50%. The central bank also revised their inflation forecasts lower, with the ECB expecting headline consumer price increases to average 2.2% in 2025 and 1.9% in 2026.

Investors paid close attention to data on the US Consumer Prices Index (CPI), which showed that headline inflation was 2.5% in August, falling from the 2.9% recorded for July. The rate of inflation was lower than expected and prompted an increase in calls for the Federal Reserve to cut interest rates at their September policy meeting.

The National Federation of Independent Business (NFIB) published their monthly Small Business Optimism Index for August, which showed that sentiment deteriorated during the month. The NFIB stated that small business owners are worried about the state of the economy, with firms expecting weaker sales in the months ahead.

Economic data in China painted a mixed picture. The Consumer Price Index (CPI) saw a year-on-year rise of 0.6% for August, with inflation accelerating slightly from the 0.5% recorded for July. Core inflation, which excludes food and energy prices, slowed from 0.4% in July to 0.3% in August, which added to concerns around China facing deflationary pressures. Exports saw stronger than expected growth in August, rising 8.7% year-on-year, whilst imports were weaker than expected with a year-on-year gain of 0.5%.

The Bank of Japan (BoJ) hinted at further interest rate hikes last week. A senior figure at the central bank stated that the current level of real rates is extremely low, with adjustments to monetary policy likely if Japan’s economy continues growing and inflation remains above trend. The comments had little impact on Japanese government bond yields, with growing expectations for a US Federal Reserve rate cut driving bond yields around the globe lower.

The week’s UK economic data appeared to support the notion that rates are too high, with the economy stagnating during June and July.

The ECB cut interest rates for the second time this year, but avoided making any firm statements regarding further rate cuts.

The debate around whether the Federal Reserve should cut rates by 0.25% or 0.50% at their September policy meeting grew during the week, with futures markets pricing in a 50% chance of a 0.50% cut.

GBP / EUR – Current 1.1850 Previous 1.1845

The Pound rose by 0.53% against the US Dollar last week as the greenback weakened given growing speculation around a larger than previously expected Federal Reserve interest rate cut. The Pound was broadly flat against the Euro (+0.04%).