WeeklyWatch – Central banks pause interest rate hikes, causing markets to rally

7th November 2023

Stock Take

Hopes that the central banks’ tightening cycle was coming to an end fuelled a robust rally last week in global equity markets, especially for small and medium-sized companies.

So, what happens now?

Interest rates maintained at latest BoE meeting

Interest rates in the UK were maintained at a steady 5.25%. Nonetheless, the Bank of England’s (BoE) messaging reinforced the current ‘higher for longer’ narrative.

The Bank announced on Thursday that its Monetary Policy Committee (MPC) had decided to stick with current interest rates by a vote of 6–3. Notably, the other three votes were in favour of raising the rate.

The Bank emphasised in its release notes that rates would need to be high for a long enough period of time in order to sustainably bring inflation back to its target of 2%. The BoE stated:

“The MPC’s latest projections indicate that monetary policy is likely to need to be restrictive for an extended period of time. Further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures.”

Senior European Economist and Strategist at Schroders, Azad Zangana, commented:

“Despite the obvious weakness in the economy’s current performance, inflation remains far too high. The BoE forecasts the consumer price index (CPI) inflation rate to drop towards 5% by the end of the year, before falling back towards target in two years’ time and beyond.

“Most of the fall in the near term is expected to be driven by declining household energy bills, along with moderating food price inflation. However, the outlook for 2024 is more difficult and requires spare capacity in the economy to lower both goods price inflation and services inflation.”

Best one-day performance in six months for the S&P 500

The possibility that the UK interest rate cycle may be coming to an end, even with the BoE’s caveats, was enough to boost markets. Throughout the week, the FTSE 250 increased 6.6%. A more moderate 1.6% gain was seen in the FTSE 100, as most of its firms were more exposed to earnings from overseas due to a stronger UK currency.

Similar optimism prevailed in the US following the Federal Reserve’s (Fed) decision to pause raising interest rates.

As a result, the S&P 500 ended the week 5.9% higher overall and had its greatest one-day performance in six months. Although advances were observed in many sectors, growth companies, particularly those in the technology sector, enjoyed strong gains.

Just like the UK, those in the Fed were eager to emphasise that decisions were ‘proceeding carefully’. During a press conference held following the release, Fed Chairman Jerome Powel stated that the central bank was asking itself, “Should we hike more?”

Continuing market volatility in Europe

Thanks in part to the Fed and BoE’s pause, European equities also rebounded last week, with the MSCI Europe ex-UK Index rising 3.6%. Rate rises were stopped earlier in October by the European Central Bank (ECB) of the EU, following ten straight increases.

The possibility of another rate hike has been made clear by the Fed and the BoE, even though markets may have rebounded from the news that interest rates could have peaked. This is an important reminder of the fact that there are still a lot of unknowns in the market and that there may be short-term volatility.

Meanwhile in Japan, the Nikkei 225 increased by 3.1% as investors responded favourably to choices made by central banks overseas. But according to BlueBay’s Chief Investment, Officer Mark Dowding, there are still some risks:

“Economic activity is being supported by stimulative monetary and fiscal policy. Meanwhile inflation continues to print above forecasts, causing policymakers to scramble to revise projections higher. In this light, it has appeared that the Bank of Japan has been making a policy mistake by keeping policy too accommodative for too long.”

Wealth Check

They say building a loving family is priceless, but how much does raising a child actually cost? The total cost of raising a kid from birth to age 18 in 2022, including childcare and household expenses, was £157,562 for a couple and £208,735 for a single parent.1 But although raising children can be costly, watching them grow up and realise their full potential often brings us the most joy.

Many parents may find it tough to make ends meet with the additional expenses that a child brings, especially when combined with the rising cost of living – never mind planning for future expenses like a car, university or a house deposit. Creating a nest egg for your children doesn’t have to be expensive, and it can even have a significant impact on their future and their financial well-being.

Head of Development and Consultancy at SJP, Andrina Nisbet, says:

“Start saving little and often – and early if you don’t want it to affect your standard of living when you are older. Allocating your money into different pots can really help create discipline.”

Head of Marketing Insights at SJP, Melloney Underhill, highlights another benefit:

“We want our children to grow up with positive money habits. Research regularly proves that these formative years have a significant impact in later life. Introducing the benefits of saving and investing for the long term from an early age is also a great way to encourage smart money habits.

“If they know how to save and budget, they’ll grow up more financially capable – and secure.”

Putting money into a pension for your kids is one option to think about.

Although it may seem strange to start a child’s pension when they are still decades away from retirement, doing so can have a significant impact. Over decades, even modest investments can grow into a sizable sum. Generally speaking, you should save as much as you are comfortable with – even £100 a month would help.

It’s not widely known that children are eligible for a pension account as soon as they are born. And setting one up can also provide major tax benefits. The maximum annual contribution to a child’s pension in the UK is £2,880, and with the 20% pension tax relief, this amount rises to £3,600. After a parent or legal guardian sets up the pension, anybody may make contributions.

Speaking to a financial adviser will help you figure out the smartest ways to save for children. Get in contact today if you’d like to discuss family finances and saving.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

1Moneyfarm, 2023.

In The Picture

Recently, interest rate hikes have been paused by major central banks, helping to boost equity markets. The question is, what will happen next?

The Last Word

“We will have, for the first time, something that is smarter than the smartest human… There will come a point where no job is needed. You can have a job if you wanted to have a job for personal satisfaction. But AI will be able to do everything.”

Elon Musk explains his view on the potential for Artificial Intelligence (AI).

Bluebay and Schroders are fund managers for St. James’s Place

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2023; all rights reserved.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP approved 06/11/2023