12th December 2023
Mixed news around interest rates
The festive period is drawing nearer, and UK investors will be holding out for an early gift from the Bank of England’s Monetary Policy Committee when they convene later this week. It’s broadly anticipated that interest will be retained at the current rate of 5.25%.
Indeed, the Bank’s November Inflation Attitudes Survey would have bolstered this perspective last week in disclosing that public expectations of inflation had slumped to their lowest level in two years. The median expectation of the rate of inflation over the year ahead was 3.3%, which contrasts with 3.6% in the August edition of the survey.
Such surveys can prove to be a helpful touchstone – if employers foresee lower inflation, this suggests that wage growth may also decline. To this end, the survey forms part of the Monetary Policy Committee’s extensive dataset for determining interest rates.
Nevertheless, it wasn’t all positive news. Yesterday morning, the Confederation of British Industry announced it anticipated that 2024 would be another year of weak growth for the UK economy. Further to GDP growth of 0.6% in 2023, the Confederation now expects growth of merely 0.8% in 2024. It specifically predicts that growth in consumer spending will continue to be fragile next year due to higher interest rates taking a larger chunk out of household incomes.
Likewise, Schroders said it expects the UK to fall into recession within the first half of 2024.
Given that a General Election is set to be called next year, this might prove difficult for the sitting government. It’s important to remember that, from an investment standpoint, the majority of revenues in the FTSE 100 comes from abroad. In this way, even if the wider UK economy is struggling, there will still be opportunities for fund managers to find growth.
Data across the globe
Shifting the gaze to mainland Europe, equities sustained their recent rally last week. There is a sense of hope that the European Central Bank (ECB) may cut interest rates in the near future.
The decline in inflation over recent months has stoked this optimism, with headline inflation now only a fraction ahead of the ECB’s target of 2.0%. Several senior policymakers signalled last week that future rate increases are doubtful, given the disinflationary backdrop. This helped to elevate the MSCI Europe ex. UK Index by 1.6% by the close of play on Friday.
The ECB will hold its final policy meeting of 2023 this week, and while no changes to interest rates are expected, any intimation of a near-term change in direction will be warmly received by the market.
In the US, the S&P 500 crept 0.2% higher. Yet again, growth stocks outmatched their value counterparts thanks to the likes of Alphabet and Apple, the latter of which returned to a $3 trillion market capitalisation.
Guided by such large tech companies, US equities have been a driving force in global markets throughout 2023. However, Eoin Walsh, Partner at TwentyFour Asset Management, forewarned that US consumer sentiment is diminishing, which might prove to be a challenge in 2024.
“The US economy looks to be in ‘late cycle’ and therefore more vulnerable to an external shock – although it is impossible to predict, or time, an event like this. However, should the economy suffer a significant slowdown or recession, we think it will very likely have been caused by the Fed’s rate-hiking policy – but importantly, the Fed is now in a place to help again by cutting rates. This is a strong position to be in, and healthier for the market, and while we think the Fed will be supportive, we are not predicting a return of low, COVID-era rates or quantitative easing.”
The upcoming Presidential election, due to be held next year, adds further notes of unpredictability to the US market. As things stand, it would appear that the election will once again see Joe Biden encounter Donald Trump, and, at the time of writing, it seems that the election could be extremely close.