The numbers for the week – 25 Sep 23

The numbers for the week – 25 Sep 23

Markets last week

Market sentiment was hit last week with central bank meetings mostly responsible for it. It wasn’t just the systemically important global central banks – US Federal Reserve (Fed), Bank of England (BoE), Bank of Japan (BoJ) – that met last week, but a grand total of 11 central banks across the world including developed markets like Switzerland, Norway, Sweden, and emerging countries like Brazil, South Africa and Indonesia. In general, they provided no rate increase or less than expected.

It was of course the Fed that was eagerly awaited by markets. The pause in rates was widely anticipated and the possible additional hike pencilled in before year-end did not surprise. It was the change in 2024 rate forecasts that had an impact on investors, however. Fed officials are now projecting only 50 bps of rate cuts next year rather than the previous 100 bps, emphasising the “higher for longer” message in the commentary by Fed Chair Jay Powell.  Markets are meeting them only halfway, as they still have some 75 bps of cuts priced into next year, assuming that a recession will bring about lower rates, although the field is still split between those expecting a soft landing and a downturn. Fewer rate hikes, if any, are now anticipated almost anywhere, despite any comments to the contrary by central bankers.

Government bond markets have diverged quite sharply, with US bond yields rising even as some other parts of the world see stable to downward bond yields. The takeaway from last week’s Fed meeting was an upgrade to US growth estimates, lower unemployment and lower inflation ahead. This positive environment now assumes that future rates cannot come down as much as was previously priced in, hence many market participants selling equities recently.

In the US, the 10-year Treasury yield rose to 4.5% during the week, the highest since 2007. The divergence between the UK and the US was very sharp, with US bond yields jumping as gilt yields fell sharply, driving sterling more than 1% lower vs. the US dollar.

The autoworkers strike in the US continued unresolved and the US government seems to be heading for a face-off on a potential shutdown.  These factors have yet to move markets meaningfully but could be an upcoming issue.

At the end of the week, equities were down almost 3% globally, although UK investors were partly protected by the weaker pound as well as the resilient sectors within the FTSE 100 Index. It was hard to find bullishness, however, with all sectors losing, but defensive sectors (utilities, healthcare, consumer staples) and energy were less affected, whereas consumer discretionary, technology and materials suffered more.

The week ahead

Friday: Chinese Purchasing Managers Indices (PMI)

Our thoughts: for the whole of this year, China has disappointed economists and markets. The Chinese authorities have stuck to constant small reforms and stimulus steps, hoping to break the back of the negative mood with both consumers and companies. Has any of it worked? Every new set of statistics brings out the same question. The PMIs tend to give directional clues ahead of moves in the economy. Manufacturing has been more challenged than services, as the tense political backdrop with the US has hurt industrial exports, but consumers have also been reluctant to spend and hence services have not fully offset the manufacturing gloom. Is there any change ahead in that equation? 

Friday: Eurozone inflation

Our thoughts: despite the differences from country to country, inflation as a global phenomenon is having an impact on all markets. The eurozone will be an important area to watch. Its inflation levels are lower than in the UK but higher than the US and the European Central Bank (ECB) has just raised interest rates to keep fighting high prices. The message, however, seemed to be less forceful for further ECB meetings ahead, so the question is whether inflation levels in the eurozone will keep falling after some recent surprises. Any negative news could affect global markets.

Friday: US Personal Consumer Expenditure (PCE) inflation

Our thoughts: the Fed has just met and delivered no change in its interest rate policy. The next meeting is in November and there are many data points and events between now and then. The PCE inflation rate is an important one, as the core PCE (ex food and energy) is the gauge that the Fed follows most closely and it’s still above 4%, which is more than twice the Fed’s 2% target. Many Fed officials are mentioning this fact and hence the next set of PCE numbers should have an impact on the Fed and therefore on investors.  How much of the previous movement from month to month in the PCE was due to one-offs, is something that will be followed closely.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

The Fed spooked markets with higher for longer rates next year. The BoE surprised somewhat by not hiking

The Fed kept interest rates unchanged as widely expected by markets. It did, however, make significant changes to its economic and rate forecasts, which had a big impact on markets. A total of 12 of the 19 Fed officials said they still expect to raise rates once more this year, although investors seem to be sceptical about this possibility. The major takeaway though was the Fed’s expectation of fewer rate cuts than previously anticipated in 2024. Comments made by Fed Chair Jay Powell included: “we are prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably toward our objective.”

The future rate forecasts (known as the ‘dot plot’) were raised by about 50 bps for 2024 and 2025, emphasising the ‘lower for longer’ message. The Fed’s economic projections were also revised meaningfully, with higher growth and lower unemployment ahead. US equities fell sharply in response to the Fed meeting.

The BoE delivered a cliff hanger decision, finally keeping the bank rate unchanged at 5.25% in a 5-4 vote with 4 members of the Monetary Policy Committee (MPC) voting for a rate increase instead.  This was the first pause in the relentless rate hiking cycle since December 2021 and had an impact on UK markets, with sterling dropping more than 1% whilst gilt yields eased by a couple of basis points. The comments made by the MPC highlighted the July 0.5% growth slump, with ‘increasing signs of some impact of tighter monetary policy on the labour market and on momentum in the real economy more general.’ The speed of selling UK assets (known as quantitative tightening) was increased from £80bn per year to £100bn despite the unchanged rate decision.

The BoJ once again decided not to make any changes to its interest rate policy and yield curve control, which disappointed investors and weighed on the Japanese yen.

The People’ Bank of China (PBoC) left prime rates unchanged, with the 5-year loan prime rate at 4.20% and the 1-year loan prime rate at 3.45%.

United States

Jobless claims still going against consensus that employment should weaken. Surveys weaker except for manufacturing PMI

Surveys: the New York Fed Services Business Activity Index fell from +0.6 to -3.0. The Philadelphia Fed Business Outlook unexpectedly slumped from +12.0 to -13.5.

The S&P Global PMIs were very resilient in the light of other surveys, with the manufacturing PMI rising from 47.9 to 48.9 and the services PMI easing from 50.5 to 50.2. The Leading Index stuck to its negative trend, down -0.4% in August following -0.3% previously.

Housing: the National Association of Home Builders (NAHB) housing market index slumped from 50 to 45, the second drop in a row. Housing starts fell a massive 11.3% in August, mostly driven by multi-family construction down to the lowest level since 2020 as opposed to single-family units which have accelerated. Building permits surged 6.9% having recovered from their January low. Mortgage Bankers Association (MBA) mortgage applications rose a strong 5.4% in the week ended 15 September.

Existing home sales fell 0.7% in August, following -2.2% the prior month.

Employment: weekly jobless claims fell very sharply with initial claims dropping to 201K, the lowest level since January and continuing claims down to 166K, the lowest level this year, although there was sharp drop from July layoff notices which may have affected this series.

United Kingdom

Better inflation data and strong consumer confidence don’t seem to help services survey

Inflation: there was a positive surprise on the Consumer Price Index (CPI), with the headline CPI falling from 6.8% to 6.7% against expectations of an increase, and a much lower core inflation (ex food, energy, tobacco and alcohol) at 6.2% from 6.9%. Sterling fell on the news. The Producer Price Index (PPI) went in the opposite direction, with the PPI input up from -3.2% to -2.3% and the PPI output from -0.7% to -0.4%.

Housing: the house price index eased in July from, 1.9% year-on-year to 0.6%.

Public finances: the Public Sector Net Borrowing Requirement was much higher in August, at £10.8bn, up from £3.5bn which was revised down to a negative £1.2bn.

Surveys: the GfK consumer confidence survey jumped from -25 to -21, the highest level since January 2022. The S&P Global/CIPS PMIs showed a small improvement in manufacturing but a further drop in services, with the manufacturing PMI up from 43.0 to 44.2 but the services PMI sharply down from 49.5 to 47.2.

The Confederation of British Industry (CBI) Trends survey was mixed with total orders falling from -15 to -18 but selling prices rose from +8 to +14.

Consumer: retail sales in August rose 0.4% including auto fuel and 0.6% excluding auto fuel.


Some green shoots in cars and construction and maybe a small improvement in services survey

Industry: new car registrations in the EU 27 countries climbed 21% in August year-on-year, up from 15.2% the prior month, with electric vehicles particularly strong.  Construction output in the eurozone rose 0.8% in July after a negative 1.2% the previous month.

Inflation: the German PPI turned even more negative, from-6.0% to -12.6% in August.

Surveys: eurozone consumer confidence fell from -16.0 to -17.8. The HCOB eurozone PMIs did not move much with manufacturing a tad off from 43.5 to 43.4 and services a bit better at 48.4 vs. 47.9.  French business confidence was unchanged at 100, economic confidence improved from 97 to 99 and the production outlook indicator from -9 to -6.


No meaningful data from China. Japan still strong but less so

Japan: foreign trade was weaker in August, with exports down to -0.8% year-on-year from -0.3% and imports down to -17.8% from -13.6%.

Japanese inflation did not move much, with the CPI easing from 3.3% to 3.2% and the ‘core-core’ CPI ex fresh food and energy (followed by the BoJ) stable at 4.3%.

The Jibun Bank PMIs were softer with manufacturing falling from 49.6 to 48.6 and services from 54.3 to 53.3.

Oil/Commodities/Emerging Markets

Pause in oil prices

A pause in oil prices in their upward trend is not helping global economies which are bearing the double-whammy of higher energy and a higher US dollar.  Copper is reflecting a global growth slowdown, but gold is flat despite the strong dollar.

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