Market Commentary: week to 6 August 2024
The Bank of England ("BoE") recently made its first rate cut in over four years, stirring cautious optimism about the UK's economic future. Although BoE Chief Economist Huw Pill acknowledged an improved outlook, he noted the growth rate remains modest at around 1% annually from 2024 to 2026. The narrow 5-4 vote for the rate cut underscores persistent inflation risks. Surveys show a slight decline in firms' expectations for wage growth and inflation. The BoE's survey revealed expected wage growth fell to 4.1% and the one-year-ahead consumer price index dropped to 2.5%. Similarly, the Citi/YouGov survey showed stability in one-year inflation outlooks and a minor rise in long-term expectations, reflecting the BoE's increased confidence in disinflation.
The BoE's annual report disclosed a significant government transfer of nearly ￡45 billion to cover recent losses, raising concerns about monetary policy sustainability. Despite fiscal challenges, the BoE's rate cut has positively influenced market sentiment. However, optimism is tempered by the recent decline in sterling. UK Chancellor Reeves hinted at possible tax increases in the October budget, despite pledges to keep major taxes unchanged. Acknowledging a ￡22 billion funding gap due to a public sector pay rise adds to fiscal pressures. A Deloitte survey revealed increased optimism among UK Chief Financial Officers, with post-election risk appetite rising and expectations for corporate revenues at a two-and-a-half-year high. However, companies remain cautious, focussing on cost reduction and cash flow improvements.
Recent data shows a mixed UK labour market picture. The Adzuna Job Market Report highlighted a nearly 20% drop in job vacancies in June, indicating recent economic growth hasn't yet boosted hiring. The number of job seekers per vacancy has increased while retail sales have continued to struggle, with the Confederation of British Industry reporting a second consecutive month of declining annual sales. Unfavourable weather and market uncertainty are key factors, with retailers expecting continued order cutbacks. The housing market remains stable, with consistent mortgage approvals of around 60,000. Reports from Zoopla and Nationwide suggest a slow property market recovery, with modest house price and sales activity increases.
Globally, sentiment is dominated by growth and recession concerns, highlighted by weak US employment and manufacturing data. The nonfarm payrolls report fell short of expectations, and unemployment rose, intensifying economic slowdown fears. This has increased expectations of a Federal Reserve rate cut. Middle East tensions have also impacted markets, with geopolitical events driving oil price volatility. Despite this, corporate earnings have shown resilience, with the S&P 500 seeing a blended second-quarter earnings per share growth rate of 11.5%. Additionally, the Japanese yen strengthened against the US dollar as the Bank of Japan increased its interest rate to approximately 0.25%. This led to a significant sell-off of Japanese equities, with the Nikkei 225 closing the week about 4.7% lower and selling momentum continuing into Monday. Weakening US data and Japanese equities have sparked recession fears, with several global equity indices experiencing downward momentum.
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