Market Commentary: week to 13 August 2024

Last week saw various economic developments, including the National Institute of Economic and Social Research (“NIESR”) publishing its forecast, predicting a slower interest rate cut cycle by the Bank of England than the market expects. NIESR anticipates that economic recovery will accelerate, prompting the BoE to maintain higher interest rates for a longer period. The Bank of England's interest rate is expected to decrease gradually, reaching 4.6% in 2025 and 4.1% in 2026, before bottoming out at 3.1% in 2028. Additionally, economists are divided on the BoE's next rate cut, with mixed views on the timing and size of potential easing, though domestic inflationary pressures seem to be receding.

In other economic news, the UK economy grew more than expected in 2022, with gross domestic product revised upward to 4.8% by the Office for National Statistics, reflecting resilience despite impacts from global events. The services sector saw its fastest growth since May 2023, driven by strong demand and increased business confidence, while hiring signals in London's financial sector were mixed, with some industries showing strong demand for permanent workers despite a decline in financial services vacancies. Meanwhile, UK retail sales remained weak, though slightly improved from June, and a survey by KPMG and the Recruitment and Employment Confederation indicated a slowdown in wage growth as demand for staff declined.

According to real estate software firm MRI Software, UK high streets experienced a significant drop in footfall last week, with a 4.8% decline attributed to riots across England and Belfast, peaking at a 7.5% drop on Wednesday as shoppers avoided potential unrest. Meanwhile, the Institute for Fiscal Studies warned Chancellor Rachel Reeves against altering debt rules to increase fiscal space, arguing that it wouldn't change the underlying issue of government borrowing. The NIESR cautioned that the government's growth target of 2.5% would be unattainable without an additional ￡50 billion in annual investment, projecting sluggish growth without substantial fiscal intervention.

US equities declined over the week, recovering slightly from Monday's sharp drops, which marked the S&P's worst performance since September 2022 and the Nasdaq's worst since October 2022. The decline was sparked by a weaker-than-expected July payroll report, raising concerns about a hard landing and potential Federal Reserve actions. Despite the turbulence, the S&P ended the week less than 6% below its mid-July record, though the Nasdaq remained in correction territory. Sector performance was mixed, with big tech mostly lower except for Meta Platforms, which gained 6.1%. Treasuries weakened slightly, oil prices rose 4.5% and market discussions focused on economic resilience, Federal Reserve actions and ongoing challenges.

UK construction activity surged in July, with the S&P Global Construction purchasing managers index reaching 55.3 versus 52.2 previously, its fastest increase in 26 months, driven by new orders and growth across all sectors. Halifax reported a 0.8% rise in UK house prices, the highest annual growth rate since January 2024, supported by potential BoE rate cuts and lower mortgage rates.

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