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It’s been a losing week for the FTSE as The Bank of England keeps rates on hold. The TPP weekend update.

Market Activity

It’s been a losing week for the FTSE as The Bank of England keeps rates on hold. The TPP weekend update.

A look back at the last week.

September 22, 2024

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It’s been a losing week for the FTSE as The Bank of England keeps rates on hold.

The Bank of England (BoE), as expected, held its key policy rate at 5.0%, with the Monetary Policy Committee voting 8–1 in favour of no change. Unusually, the bank provided forward guidance on the rate path, noting that “in the absence of material developments, a gradual approach to removing policy restraint remains appropriate.”

Governor Andrew Bailey stressed, “It is vital that inflation stays low, so we need to be careful not to cut too fast or by too much.” Still, Bailey added that he was “optimistic” rates would fall further once there was evidence that underlying price pressures were cooling.

Headline inflation came in at an annual rate of 2.2% in August, unchanged from July, but year-over-year price increases in services, closely watched by the BoE because of the wages component, quickened to 5.6% from 5.2%.

In economic news, UK consumer confidence took a significant hit in September, according to the GfK consumer confidence index, which fell to -20 from August's -13.

The decline reflected widespread pessimism across all sub-measures, including a steep drop in expectations for personal finances and the broader economic outlook.

Despite recent stability in inflation and an earlier interest rate cut, the mood had darkened as people await next month’s Budget, which was expected to address a £22bn shortfall in public finances.

Adding to concerns, recent data showed that the UK economy stalled in July, with GDP unchanged for the second consecutive month.

“Despite stable inflation and the prospect of further cuts in the base interest rate, this is not encouraging news for the UK’s new government,” said Neil Bellamy, consumer insights director at GfK.

“Strong consumer confidence matters because it underpins economic growth and is a significant driver of shoppers’ willingness to spend. “Following the withdrawal of the winter fuel payments, and clear warnings of further difficult decisions to come on tax, spending and welfare, consumers are nervously awaiting the Budget decisions on 30 October.”

Despite the gloom, retail sales in August exceeded expectations, climbing 1% after a revised 0.7% rise in July. That marked the highest level of sales since July 2022. The Office for National Statistics highlighted that supermarkets and clothing retailers were buoyed by warmer weather and end-of-season promotions.

On an annual basis, sales jumped 2.5%, the largest increase since February 2022.

While food store sales surged, non-food sales showed more modest gains, suggesting that consumer spending remained robust in some areas despite broader economic challenges.

“Nonetheless, end of week profit taking took its toll on US and European stock indices on Friday.

In the UK an unexpected rise in retail sales didn't prevent the FTSE 100 from dropping by over a percentage point.” On Friday the FTSE 100  fell 1.19% to finish the week at 8,229.99 points, while the more domestically-focussed FTSE 250 dropped 1.56% to close at 20,831.84 points.

Europe

The STOXX Europe 600 Index ended 0.33% lower, as the rally triggered by the U.S. Federal Reserve’s interest rate cut faded and investors grew cautious about the outlook for monetary policy. Major European stock indices however advanced with Italy’s FTSE MIB increasing 0.58%, France’s CAC 40 Index adding 0.47%, and Germany’s DAX eking out a 0.11% gain.

Recent comments from hawkish European Central Bank (ECB) policymakers indicated that further easing of monetary policy should be gradual, given persistent underlying inflation pressures.

Germany’s Joachim Nagel said that although he sees inflation returning to the 2% target by late 2025, it was still too high, so the timing of easing decisions could vary. Chief Economist Philip Lane said that gradual easing is appropriate if economic data are in line with the baseline forecasts.

On the economic front, hourly wages and salaries in the eurozone grew at an annual rate of 4.5% in the three months through June, down from a revised 5.2% in the first.

The U.S.

The large-cap indices moved to record highs as investors celebrated the kick-off to what many expect to be a prolonged Federal Reserve rate-cutting cycle. The rally was also relatively broad with the smaller-cap indexes outperforming, although they remained below previous peaks, the small-cap Russell 2000 Index ended the week roughly 9% below the all-time high it established in November 2021.

The Dow Jones Industrial Average closed the week 1.62% higher, the S&P 500 was 1.36% higher and the Nasdaq 100 in between with a gain of 1.42%.

The event dominating sentiment during the week was the Fed’s rate announcement following its policy meeting concluding Wednesday. Over much of the previous week, according to futures markets tracked by the CME FedWatch Tool, opinion had been roughly split as to whether policymakers would cut rates by a quarter point (25 basis points, or 0.25 percentage points) or a half point (50 basis points, or 0.50 percentage points).

The initial reaction to the Fed’s decision to “go bigger” and cut rates by 50 basis points, the first cut of any size since March 2020, was relatively muted, with the S&P 500 Index falling slightly to end the day. However, market declines in the wake of the start of a Fed rate-cutting cycle have not been unusual, occurring on two out of five such occasions since the mid-1990s. Indeed, investors’ celebration of the news seemed to begin on Thursday morning with the Dow Jones Industrial Average, S&P 500 Index, and Nasdaq Composite all surging to new highs.

The yield on the benchmark 10-year U.S. Treasury note rose, but not dramatically, in the wake of the Fed’s decision on Wednesday, touching its highest intraday level since September 5 (Bond prices and yields move in opposite directions).

Asia

Japan’s stock markets rose over the week, with the Nikkei 225 Index gaining 3.1% and the broader TOPIX Index up 2.8%. Midweek, Japanese equities benefited as the yen weakened on the U.S. Federal Reserve’s latest monetary policy decision. On Friday, the Bank of Japan’s (BoJ’s) decision to leave rates unchanged weighed further on the yen. The Japanese currency depreciated to around JPY 143.8 against the U.S. dollar, from about 140.8 at the end of the previous week. The yield on the 10-year Japanese government bond rose to 0.86%, from the prior week’s 0.84%.

At its September 19–20 meeting, the Bank of Japan left its key short-term interest rate unchanged at around 0.25%, as had been widely anticipated (and yes, we did say 0.25%).

The BoJ has raised rates twice in 2024, in March and July. In its assessment, inflation expectations have risen moderately, while Japan's economy is likely to keep growing at a pace above its potential growth rate, as a virtuous cycle from income to spending gradually intensifies.

Chinese equities also rose in a holiday-shortened. The Shanghai Composite Index gained 1.21%, while the blue chip CSI 300 added 1.32%. In Hong Kong, the benchmark Hang Seng Index gained 5.12%, according to FactSet. Markets in mainland China were closed Monday and Tuesday for the Mid-Autumn Festival. Hong Kong markets were closed Wednesday but reopened Thursday.

August data underscored the slowing momentum in China’s economy. Industrial production rose 4.5% from a year earlier, lagging forecasts and down from July’s 5.1% increase amid weaker commodity prices and auto sales. Retail sales expanded a below-consensus 2.1% from a year ago, easing from July’s 2.7% rise. Fixed asset investment rose a lower-than-expected 3.4% in the January to August period, down from the 3.6% expansion recorded in the first seven months this year, while property investment fell 10.2% year on year.

Gold prices were still surging, adding another per cent to the week's gains and reaching new record highs around the $2,615 per troy ounce mark.

The interest rate outlook will keep a lid on the recent recovery in the US Treasury bond yields, which is seen undermining the US Dollar (USD) and benefiting non-yielding gold.  

Apart from this, persistent worries over a slowdown in the United States (US) and China,  the world's two largest economies, and the risk of a further escalation of geopolitical tensions in the Middle East turn out to be another factor lending support to the Gold price.

Having said this, demand is much more likely to be led by China at the moment given the collapse of their stock market and the state of their economy. Money will be moving out of the markets and into gold. It is very rare for equity markets and gold to both not only rally, but both be at all time highs. But, we often focus too much on the US. Gold usually rallies when markets fall, which they aren’t, unless we look to China for the cause.

Oil prices slid slightly following its 6% gains from its September multi-year lows.

Crude Oil consolidated just below $71 on Friday after popping higher by nearly 3% the previous day as a peace or ceasefire deal in the Middle East seems further away than ever. Israel stepped up its offensive after the rare pager and walkie-talkie explosion with bombardments on Lebanon on Thursday. The offensive is a big setback for any negotiation and puts the region back on high alert.

The Week Ahead

This week we have several flash Purchasing Manager Index surveys in. This is an estimate of a country’s rate of manufacturing with a reading above 50 indicating growth, and below 50 indicating contraction.

On Monday we’ll see France, Germany and the UK all present current estimates. There are two different sectors readings for these, manufacturing and services with the composite reading also being released. This tells us the combined PMIs providing a weighted average based on specific economies and geography.

In the UK the consensus is for a composite reading of 53.8 with both services and manufacturing showing growth. France should come in slightly lower around 53.1 and Germany is still in contraction with a consensus reading of 48.4.

Later in the week we have an interest rate decision from the Bank of Australia. This is expected to remain steady at 4.35%.

Thursday is US GDP which we are expecting to be another strong number of around 3% Quarter over Quarter. The US economy remains strong despite what you might be hearing.

Then we finish the week with the all important PCE Price Index which is expected to flatline at 0.2% after the same reading last month. The Fed keep a close eye on this reading and any sign of it ticking up could cause concern for those betting on another 50 point rate cut in November.

In the UK, Thursday is a big day next week with FTSE 100 stalwart Halma and water utility Pennon the standouts of a steady few days for scheduled announcements.

Another notable event will be Flutter's capital markets day on Wednesday with a slew of possible catalysts for the share price expected, according to brokers.

"Capital allocation, US guidance, FanDuel and tax, addressable market (TAM) upgrades, US opportunities and the Snaitech acquisition" will all be under scrutiny reckons UBS.

The markets are full of confidence at the moment but after the gains this year, we would be cautious about getting complacent. Tension in the Middle East and Russia seem like problems of the past for equities, but it wouldn’t take much for nerves to creep back in.

Have a great Sunday and good luck in the markets this week.

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