Markets last week
Last week was a particularly important week for the Bank of England (BoE) and the UK economy, as on Wednesday the UK consumer price index (CPI) data for October was expected to show a significant drop in inflation. Thankfully the consensus proved to be correct, with headline year-on-year inflation falling from 6.7% to 4.6% – trivially better than the consensus expectation for a fall to 4.7%. Month-on-month inflation came in at 0.0%, indicating that prices remained constant through October. These numbers represent significant progress for the BoE in their fight against inflation and created a positive backdrop for financial markets this week.
Last week was a good week for markets, with equity and bonds both in positive territory. It was a particularly good week for the UK mid-cap FTSE 250 Index, which finished the week up 4.0%, leading global equity markets. The broader UK market also performed well, with the FTSE All-Share Index finishing the week up 2.3%. The best performing sectors were real estate and materials, while the worst performing sector by some margin was energy, as oil prices continued to fall last week.
The UK bond market also performed well as gilt yields fell during the week. The 10-year UK government bond yield fell from 4.34% at the start of the week to 4.1% by the end of the week. As well as the softening of inflation spurring this move, the surprise drop in retail sales data announced on Friday drove yields down further. The volume of goods sold dropped 0.3% in October, when economists had anticipated a rise of 0.4%. Retailers attribute the decline to the cost-of-living crisis. The data underscores the impact of 14 consecutive rate hikes by the Bank of England.
It was a remarkably similar story in the US last week, as markets rallied on the back of a promising inflation print. US CPI for October came in at 3.2% year-on-year, falling from 3.7% in September. Core inflation, which excludes volatile food and energy prices, fell unexpectedly, although only marginally, from 4.1% to 4.0%. The small positive surprise was enough of a catalyst to excite markets higher as it added to the growing narrative that the US Federal Reserve (Fed) is now most likely finished hiking rates. The US equity market ended the week up 2.2% in USD terms, but only 0.4% in GBP terms. Similarly to the UK, the best performing sectors were materials and real estate, with energy the laggard. Treasury markets were also positive last week as the US 10-year yield fell from 4.65% to 4.46%. Almost all of this move came around the inflation print on Tuesday.
European stocks climbed 3.6% in GBP terms, fuelled by moderating inflation and speculation surrounding a potential easing in monetary policy projections. November has provided a much-needed respite for European investors after three consecutive months of declines. Despite the rebound this month, concerns persist about economic growth, and a less optimistic outlook for corporate earnings is tempering overall market sentiment.
Energy markets were more challenged last week and cemented their fourth consecutive weekly decline. Brent finished the week at US$80.61bbl and West Texas Intermediate (WTI) closed at US$75.89bbl. The slump has wiped out all previous gains driven by geopolitical tensions, resulting in a more than 15% decrease since the onset of the conflict in the Middle East in early October. Traditionally, conflicts in the Middle East have limited market impact unless major oil-producing nations are involved. Oil is reverting to contango (where the futures curve is upward slowing) after spending much of the year in backwardation (when the futures curve is downward sloping), indicating an oversupplied market and the likelihood of growing inventories. If this curve contango intensifies, this could solidify the bear market trend.
The week ahead
Minutes provide more colour on central bank meetings
Tuesday: FOMC Meeting Minutes
Our Thoughts: The minutes from the Federal Open Market Committee (FOMC) meeting from the meeting on 1 November will provide an insight into the policy statement and the slightly more dovish remarks of the Fed Chair Jerome Powell. The minutes are likely to indicate that Fed officials are observing growing indications of a cooling labour market and the evident signals of a deceleration in credit demand as indicated by the recent Senior Loan Officer Opinion Survey.
Wednesday: UK Autumn Statement
Our Thoughts: The Autumn Statement is scheduled on Wednesday with Jeremy Hunt, Chancellor of the Exchequer, due to speak in the House of Commons. Significant fiscal policy changes are unlikely, and we do not expect any major developments in the growth and inflation outlook. Preliminary Purchasing Managers Index (PMI) surveys for November will be released on Thursday next week, which will provide an insight into the health of the UK economy and the likelihood of contraction in the fourth quarter, having marginally avoided it in the third.
Thursday: ECB Meeting Minutes
Our Thoughts: The European Central Bank (ECB) minutes will provide an additional insight into the Governing Council of the ECB and their October policy meeting, where they held interest rates constant at 4.0%. Given the recent disinflation, the appetite for more rate hikes is likely to have diminished further.
The numbers for the week