Market Commentary: week to 3 December 2024

Last week, key economic updates highlighted mixed signals for the UK. Bank of England (“BoE”) Deputy Governor Clare Lombardelli expressed caution over wage growth trends, warning that a slowdown in wage disinflation might necessitate careful rate cut strategies. BoE official Swati Dhingra noted the UK is no longer an inflation outlier but stressed the difficulty of accurate inflation forecasting due to unreliable data. The Confederation of British Industry (“CBI”) painted a sombre picture, with surveys showing weakening sentiment in the retail and services sectors. Job cuts loom as firms grapple with tax hikes, while higher wages ahead of the holidays offer a short-term boost in hiring for sectors such as retail and hospitality. Consumer confidence waned slightly after the budget, reflecting concerns over economic stability. Despite reassurances about the financial system's resilience, the BoE’s financial stability report flagged heightened global risks, including geopolitical tensions and government debt vulnerabilities. This backdrop underscores challenges ahead for growth and inflation.

Ministers unveiled plans to abolish dozens of district councils, streamlining governance into unitary authorities to save ￡3 billion over five years. This overhaul aims to boost efficiency and growth in counties like Essex and Kent. On the fiscal front, accounting firm PwC reported a 10% rise in FTSE 100 firms’ tax contributions, hitting ￡93.3 billion, driven by a reversal in corporation tax cuts. However, Chancellor Reeves’ payroll tax increase raised concerns about job losses, potentially costing 130,000 jobs or lifting inflation by 0.9% if costs shift to consumers. Reeves ruled out further tax hikes but postponed a departmental spending review, prolonging uncertainty. Trade risks persisted, with UK exports more vulnerable to US tariffs compared to European peers. These factors highlighted fiscal complexity amid slowing government expenditure growth.

UK equity markets remained attractive despite challenges, supported by low valuations, high dividends, and robust buybacks. Mergers & Acquisitions (“M&A”) activity surged, with deals totalling $160 billion, doubling Germany’s volume, fuelled by FTSE 350 bids worth ￡52 billion. Despite political concerns, London's market remains a hub for European M&A due to its accessibility and valuations. US equities posted another strong week, with the Dow Jones and S&P 500 indices reaching record highs. Investor sentiment was buoyed by domestic policy developments and geopolitical considerations. A key driver was President-elect Donald Trump’s nomination of hedge fund veteran Scott Bessent as Treasury Secretary. Bessent’s Wall Street experience and emphasis on economic stability and inflation control reassured markets and calmed fears of aggressive and unconventional policies on trade tariffs. The market's positive momentum reflected optimism around continuity in pro-business policies.

The UK property market faces mixed signals amid higher borrowing costs. Knight Frank downgraded its house price growth forecasts for 2025-2027, reflecting concerns over prolonged financing challenges post-budget. However, affordability has improved, with Halifax noting average house prices relative to wages fell to 6.55 times annual income, down from mid-2022 peaks. Zoopla projects a rebound in 2025, forecasting 2.5% price growth and a 5% rise in transaction volumes, supported by income growth and innovative mortgage solutions. Despite headwinds, regional year-on-year growth averaged 1.5% in 2024.

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