Week ending 10th November 2023.

As you can see from the accompanying table, markets closed the week mixed.

Central banks have been actively tempering market expectations for interest rate cuts this week, following pauses in monetary policy at their latest meetings. Markets rallied following the decisions last week with hopes the latest pause marks an end to monetary tightening. However, we have said many times before, a pause doesn’t indicate the end or the beginning of a cutting cycle. Central bankers struck a hawkish tone this week to deter rate cut expectations, with some stressing a data-dependent approach to policy.

On Thursday, Fed Chair Jerome Powell said he and his colleagues remain steadfast in getting policy in line with their 2% inflation goal, stating “we are not confident that we have achieved such a stance”. He stressed the Fed “will continue to move carefully, however, allowing us to address both the risk of being misled by a few good months of data, and the risk of overtightening.” US stocks managed to close the week on a high note despite Powell’s commentary as treasury yields stabilised.

The Bank of England (BoE) and the European Central Bank have both indicated the need for continued restrictive monetary policies to control inflation. With commentary that moderated market gains. At a central bank conference held in Ireland, BoE Governor Andrew Bailey expressed that it was premature to consider reducing interest rates. This stance is a clear indication of the BoE’s cautious approach towards the current economic climate.

Looking at the UK, the latest GDP report from the ONS indicated that the economy showed no growth in the third quarter, aligning with the BoE’s projections. This stagnation comes after a modest growth of 0.2% in the preceding quarter. In a surprising turn, the monthly GDP for September revealed growth of 0.2%, exceeding expectations. However, the growth figure for August was revised downward, from the initially reported 0.2% to a more modest 0.1%.

Despite facing higher interest rates, the UK economy has remained resilient this year, avoiding a recession. This performance is notable, especially in comparison to other European nations that have experienced economic contractions. The slight GDP growth, while encouraging, indicates that the UK economy is navigating through a period of uncertainty, balancing between various growing and contracting sectors. The coming months will be crucial in determining the trajectory of both the economy and monetary policy.

In Europe, the European government bond yields increased, reflecting market reactions to the possibility of prolonged higher interest rates. This comes after assertive statements from policymakers. Christine Lagarde, President of the European Central Bank (ECB), indicated that rate cuts by the ECB are not expected for more than “the next couple of quarters.” Ireland’s annual inflation rate decreased to 5.1% in October 2023, a decline from the previous month and the lowest since January 2022. This was driven by softer price increases in various categories such as food, beverages, housing, and utilities.

Turning to China, the latest CPI report saw inflation at 0.2% year-on-year decrease in consumer prices in October 2023, which is slightly greater than the 0.1% fall expected. The drop was led by a significant fall in pork prices. China’s consumer price reduction supports the case for additional stimulus measures from the People’s Bank of China (PBOC) to counter any deflationary pressures, including reductions in the reserve requirement ratio (RRR).

Looking ahead to the coming week, all eyes will be on US and UK inflation data due out on Tuesday and Wednesday respectively. US inflation currently stands at 3.7% year-on-year in September and markets are hoping to see a fall to 3.3% for October 2023. Conversely, UK CPI remained sticky at 6.7%, unchanged from August, markets are hoping for a marked fall to 4.7%. Other data releases include China industrial production, US retail sales.

Markets will also be looking to the Asia Pacific Economic Cooperation forum where leaders from 21-member countries will meet in San Francisco next week (Nov 15-17). Talks are expected between Joe Biden and President Xi Jinping.

Kate Mimnagh, Portfolio Economist 

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