MACRO ENVIRONMENT
September brought an end to the third quarter in a slightly quieter fashion than its preceding two months. Although earnings season for equities were at an end, there were still some headlines made, with the US Federal Reserve (Fed) cutting interest rates by more than expected, Chinese stimulus introduced, and heightened tensions in the Middle East. With the US election and UK Autumn budget coming up over the next few weeks, there are plenty of factors to keep up the momentum of an interesting 2024.
Now that the COVID induced inflation is seemingly under control, Global Central Bank policy makers turned their attention to avoiding recessions and keeping up economic growth by reducing interest rates. The balancing act is to now achieve a soft landing, whereby inflation falls and stays at or around the 2% level without hindering growth.
USA
In the US, employment data showed that the US added 142,000 jobs during August which was subsequently revised up to 159,000, slightly lower than the predicted figure of 164,000. Although the new jobs data has been rather muted over the last few months, the unemployment rate ticked lower to 4.2% in August from 4.3% in the previous month.
Inflation figures have been trending downwards towards the Fed’s target of 2% from a high of 9.1% back in July 2022. August figures (which are reported in September) came in at 2.5% as expected, down from 2.9% the previous month.
These data points meant that the market expected the US to follow the rest of the World’s major Central Banks in beginning to cut its interest rates. Analysts were expecting a cut of 0.25%, however, a 0.50% reduction followed with the Fed Chairman, Powell commenting it was “a sign of our commitment not to get behind”, i.e. to start reducing interest rates before disinflation gathers too much momentum and to keep the growth in the economy.
Along with announcing the lowering of interest rates, the Fed also projected there would be further cuts of 1% by the end of 2024, followed by more cuts of 2% by the end of 2025.
Away from the data points in the economy, the US presidential election raged on with the consensus that Kamala Harris came out on top against Donald Trump in their televised debate. Harris has improved the likelihood on a Democrat win, but the race is still too close to call coming into the final few weeks.
UK
The UK paused for breath in September, with the Bank of England (BoE) in contrast to the Fed keeping interest rates steady at 5%. This was consistent with their previous messaging that they will only gradually cut rates “unless something materially changes”.
Inflation remained at 2.2% in the UK during the month as expected, slightly higher than earlier in the year primarily driven by rising energy costs, but still much lower than this time last year. Manufacturing and industrial production improved in Britain along with easing jobless claims. The consensus is another 0.5% cut in UK rates by the end of the year.
All eyes with be on Labour’s first Autumn Budget on October 30th, with Prime Minister Starmer stating that those with the “broadest shoulders should bear the heaviest burden”. Rumours are that there could be a rise in the capital gains tax rate, along with the possibility of an inheritance tax reform to plug the “£22bn black hole in public spending”.
EUROPE
The European Central Bank (ECB) continued its rate cutting cycle, reducing by 0.25% to a new level of 3.5%. With inflation at 2.2% and growth concerns in Germany and Italy, the ECB policymakers unanimously decided to cut.
After the rate cut, the Euro area inflation figures came in at 1.8%, below the ECBs target of 2%, prompting an expectation of another 0.25% drop in October. Markets are pricing in a total of 0.5% by December, followed by a further 1.6% in 2025.
REST OF THE WORLD
The biggest headline towards the end of the month came from China, where the Central Bank introduced stimulus in the forms of interest rate reductions and a refinancing of outstanding mortgages. The latter will be a transfer of value directly to consumers, which in turn the Central Bank hopes will cause the Chinese consumers to increase spending and bring the deflationary environment to a halt.
Other announcements from the stimulus package came in the form of a reduction in mortgage downpayments from 25% to 15%, with the aim to increase demand in the real estate sector which has seen a steep decline in confidence over the last few years. A fiscal policy to follow has also been announced with the understanding of a total package of somewhere in the region of 2 trillion Chinese yuan ($285bn).
Japan saw a surprise winner of their General Election, with Shigeru Ishiba winning the contest at the expense of the favourite Koizumi Jr. Ishiba is seen to favour fiscal sustainability and stronger defence ties with the US and regional partners. His first speech, however, was more moderate, citing a continuation of policies from his predecessor.
Although tensions have now risen further in the Middle East, with Iran becoming part of the conflict, global markets have yet to move significantly on the back of this. If the conflict were to escalate further however, with the potential of US involvement, we may well see some volatility.
One area that has been affected, however, are oil prices, with Iran being one of the World’s largest producers. Concerns that the war could have an issue on the oil supply chain caused a price rally towards the end of September. The oil price for the entire month, however, was down due to weak demand in China and the announcement that OPEC (the organisation representing the major oil-exporting countries) would not reduce production to support prices.
EQUITIES
September has historically been the weakest month of the year for the US stock market with an average return of -1.16% since 1926, however this year this failed to materialise and instead posted a +2.14% return – its best result since 2013. The main drivers of this were the interest rate cuts (which should encourage consumer spending and business investment), coupled with good financial results from the companies themselves. The S&P 500 is up +22.08% in 2024 when reported in dollars.
The UK stock market by contrast was down -1.77% during the month, attributed to weakness in the healthcare and energy sectors of the index, which are large components of the FTSE 100. The FTSE 100 is now up +9.62% for the year in Sterling terms.
FIXED INCOME
The 2-year US Treasury yield ended September at 3.66% (and was as low as 3.49% during the period), down from 3.91% at the start of the month. The 10-year yield curve also fell from 3.91% to 3.81% by the end of September. These falls were due to the larger than anticipated rate cuts and the Fed’s guidance on the direction of future interest rates.
On the UK side, the Gilt 2-year yields rose 0.24% from 3.76% to 4.00% as the BoE paused rate cuts. The 10-year curve was flat on the month with potentially some nervousness in the run up to the Budget at the end of October, after the disastrous announcement under the Liz Truss administration in 2022.
ALTERNATIVES & CURRENCIES
The gold price had yet another strong run in September, with the US interest rate cut meaning some investors moved assets away from the US dollar and into gold. The heightened tensions in the Middle East also supported gold, being a store of value in times of uncertainty.
September saw a continuation of the strength of the pound versus the dollar and the divergence in Central Bank policy. With the US cutting rates and the UK holding fire, it means the interest currently being paid on government debt in the UK is higher than in the US, enticing investors to hold more sterling than previously.
