Market Commentary: week to 22 October 2024

Last week's UK economic data painted a mixed picture ahead of the Bank of England's (“BoE”) November policy meeting. Inflation has dropped below the 2% target for the first time since 2021, reaching 1.7%, driven by lower energy costs and eased supply chain pressures. Meanwhile, a notable minimum wage hike has underpinned pay growth for low-wage workers, despite broader wage growth moderation. As the labour market is easing, economists increasingly expect a BoE interest rate cut, with markets pricing in a 90% chance of two 0.25% reductions by year-end. Retail sales defied expectations, rising 0.3% in September, driven by strong demand in electronics. While the BoE previously signalled potential rate cuts contingent on inflation trends, the cooling data has solidified expectations of a dovish policy shift in the coming weeks.

The upcoming 30th October UK budget is shaping up to be a pivotal moment, as Rachel Reeves navigates a challenging fiscal landscape with a ￡22 billion fiscal deficit. To address this deficit, proposals include raising employer national insurance contributions and increasing capital gains taxes on share sales, which could generate significant revenue. However, the proposals have faced pushback from business leaders and investors, with concerns over potential job losses and investment impacts being raised. The recent inflation decline below 2% has reinforced expectations for BoE rate cuts, potentially easing pressure on fiscal policy but also reducing tax revenue from inflation-related income. Meanwhile, the International Monetary Fund warned the UK of potential market backlash if debt stabilisation efforts fell short, adding urgency to Reeves’ fiscal plans.

Goldman Sachs predicted a rebound in UK Gilts following an anticipated "Gilt-friendly" budget, recommending investments in 2-year and 30-year bonds due to potential BoE rate cuts, but urging caution on 10-year bonds amid increased government borrowing. Some, however, see the upcoming US election as a bigger factor for Gilt markets than the UK budget. Budget fears are prompting Britons to withdraw more from pensions, seeking tax-free cash ahead of potential pension reforms. It was a relatively quiet week in the US, though a few key developments stood out. Economic data supported the soft/no-landing narrative, highlighted by robust September retail sales and lower-than-expected jobless claims. Earnings also played a key role, with S&P 500 companies showing blended earnings per share growth of 3.4%, slightly below earlier expectations. Banks performed well, while artificial intelligence remained a positive theme. Meanwhile, China’s stimulus updates and easing geopolitical concerns provided some optimism.

UK landlords are selling rental properties at a record pace ahead of the upcoming budget, with 18% of homes for sale previously available to rent, according to Rightmove data. This surge is driven by fears of potential tax changes and upcoming Energy Performance Certificate regulations requiring a minimum energy rating of C by 2030.

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