WeeklyWatch – September heralds US interest rate cuts

24^th September 2024

Stock Take

All eyes on the US

It was a dramatic week for the US, which saw a second assassination attempt made on the Republican presidential candidate Donald Trump. Investors’ attention was also keenly focused on the US Federal Reserve, as they awaited news of the first interest rate cut in more than four years. As they waited until Wednesday’s announcement, there were market bets that suggested that there was more than a 60% chance of a half-point interest rate cut.

US retail sales unexpectedly rose in August, as a result of consistently strong online purchasing, which countered the bets made by markets. Figures in July were also much better than initially expected. These figures combined with a rebound in manufacturing production and unemployment levels reaching historic lows strongly indicated that the US economy is running smoothly, therefore adding little fuel to the case for aggressive easing.

The decision has been made

However, the Fed decided otherwise. They suggested that they were concerned about the prospect of the economy weakening and therefore announced a huge half-point cut in borrowing costs. It was during the 2020 pandemic that reaped havoc on the global economy that the Fed last made a cut by more than a quarter point.

Jerome Powell, Chair of the Federal Reserve, evoked strong confidence in the US economy. He stated that he could see no indications of recession and emphasised the promise of excellent growth, lower inflation and a solid labour market. Consequently, the markets are fully pricing in another cut of a minimum of 25 basis points during the Fed’s next meeting which takes place in November.

What’s the impact on the markets?

Optimism about a soft landing for the US economy saw global stocks leap after the announcement was made. On Thursday, the MSCI World index closed at a record high, this was then joined by the S&P 500 and new benchmarks were hit in Australia and Indonesia. The latter accomplished their achievement before the Fed cut their interest rates by a quarter point. By having lower rates in the US other emerging markets should be given the encouragement to cut their interest rates to support growth.

How do investors proceed?

There are still several geopolitical and further risks that can still disrupt markets, but what’s key to remember is that monetary policy easing cycles (rate cuts) are fairly favourable for equities, especially in a non-recessionary period. Information that dates back to 1970 reveals that when there isn’t a subsequent recession, the S&P 500 averaged an 18% gain in the year following a first rate cut by the Fed. We’ll just have to wait and see how matters unfold, but the level of uncertainty emphasises the need to maintain diversified investments that can get the best out of global economies and markets at different stages of the cycle.

More interest in cuts across the globe – starting with the UK

Other central banks made interest rate decisions last week including the Bank of England and Bank of Japan. Before the BoE made their announcement, it was revealed that UK inflation held steady across the year to August at 2.2% and this was despite pickups in price growth and in the services sector. These figures supported the notion that the BoE wouldn’t change their rates.

This notion prevailed when the bank’s Monetary Policy Committee voted 8-to-1 to keep rates on hold. More cautious in his tone and approach to cooling inflation than his Fed counterpart, Governor Andrew Bailey implied that the BoE should be able to gradually cut rates in the upcoming months, however, inflation is still expected to rise to about 2.5% by the end of 2024.

The UK economy still faces several challenges. After the BoE’s announcement, it was revealed that government borrowing across August had risen to its highest monthly level since the pandemic across 2021. This large increase in borrowing meant that national debt rose to 100% of the UK’s annual economic output – levels not seen since the 1960s. This information has heaped pressure on the government as they prepare to announce the October Budget which Prime Minister, Keir Starmer has pre-warned people will be “painful”.

On Friday, a survey was published, that indicated that these worrying warnings and a likely tax increase are responsible for a decline in UK consumer confidence this month – reaching a six-month low. For retail sales, it was more positive news, but the government’s ambitions for the economy are already adding pressure to this area already.

And now to Japan

At the end of the week, the Bank of Japan opted to hold rates steady, but stated a more positive assessment of private consumption, indicating confidence that their economic recovery is on track and therefore will be able to raise their interest rates again over the next few months. These hopes were encouraged further following the news that core consumer inflation accelerated for its fourth straight month in August.

Asian stocks built on this news, but China remained outside of this. They unexpectedly left benchmark lending rates unchanged despite the large amount of weak economic data. Despite this, many investors think that further stimulus is coming down the line. This, coupled with the Fed’s decision to make a sizeable cut, should give Beijing more scope to ease policy without putting more pressure on its currency.

Wealth Check

Facing the financial pinch

Households of all income types have faced challenges over the last few years. It’s meant that families have had to focus on day-to-day costs meaning that they’ve been unable to put money into longer-term investments and into their pension savings. And it’s looking ever more likely that the government will be raising certain taxes, particularly those that protect personal assets. As a result, longer-term planning could be impacted.

Despite the overall economic forecast looking more positive, the upcoming withdrawal of the Winter Fuel Allowance combined with the expected rise of energy prices and tax rises could mean that many families still have challenges ahead of them.

Help is at hand

During these tricky financial situations, you might think that a financial adviser can’t do much to help. But it’s during these challenging times that expert advice can be extremely valuable and give you peace of mind.

Having the conversation

In this section, we’ll explain how financial planning and expert advice can protect your short and long-term financial security.

Discussing finances, particularly with other family members, presents its own unique challenges. These conversations can become emotionally charged and can cause disagreements, leading many of us keen to avoid the subject of money unless absolutely necessary.

At Wellesley, we pride ourselves on our exceptional and expert financial advice, but as well as this, we’re proud to assist people in having better conversations about money. This is particularly prevalent when ‘things are tight’. By involving an adviser, who is able to be impartial to the relationship dynamic, they’re able to objectively explain all options to all parties to help resolve any conflict.

Starting a conversation about money management, or voicing your worries is the first step towards feeling better about the situation. It’s a crucial part of the process in allowing you to take control of your finances and get them back on track.

Keep planning

You may already have a ‘financial plan’ or ‘budget’ put in place that you’re using to help achieve your financial goals. These plans may include careful household budgeting, saving into ISAs, monthly contributions to pensions or investments, or insurance policies. All are well-tested and good strategies.

Don’t be scared to change course

However, as prices continue to rise with inflation, as seen in 2021 and 2022, even the best thought-out plans can be shaken. You may find yourself struggling to keep up with things like regular pension contributions or savings or find yourself digging deeper to meet day-to-day costs. The temptation to ignore longer-term financial goals and solely focus on short-term issues is incredibly strong.

The tax regulations regarding pensions, inheritance and capital gains can also change, meaning that your financial plans will need to be adapted in order to keep your finances on course.

Wellesley working with you

At Wellesley, we spend our time creating specific, unique and actionable plans to help people achieve their financial goals. Our plans are formed on the basis of realistic calculations of how much we believe they’ll need. We’re also able to adapt these plans to make people feel empowered. For example, for people who feel that they can’t afford to save for retirement, our adaptable plans for their situation gives them the encouragement to know that they can still do this.

Past performance is not indicative of future performance. The value of an investment with Wellesley 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. The value of any tax relief is dependent on individual circumstances.

In The Picture

The graph below shows the shift in interest rates from the Bank of England, European Central Bank and the Federal Reserve over almost 40 years. There’s an expectation to see more interest rate cuts in the short, but it’s not widely believed that they’ll reach as low a level as they did in the decade that occurred after the global financial crisis. Our view is that rates will likely settle somewhere higher for a longer period of time.

The Last Word

“I proved everyone wrong, I wasn’t going to be denied tonight.”

– Daniel Dubois Heavyweight champion, on his victory against Anthony Joshua in front of 96,000 fans at Wembley stadium.

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.

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SJP approved 23/09/2024