November Monthly Market Update: Reflections on October 2024

The pound fell and bond yields climbed following the Labour government’s first Budget in 14 years. The FTSE 100 also edged down before recovering. The government unveiled a ￡40 billion package of tax increases, including a rise in employer National Insurance contributions, the introduction of inheritance tax on pensions and higher Capital Gains Tax rates.

UK inflation eased to 1.7% in September, marking the first time it has fallen below the Bank of England's target since 2021. The fall was bigger than expected, raising the likelihood of further interest rate cuts in the coming months.

The Bank's rate-setting committee is expected to lower its key interest rate once more in early November. This would follow a previous rate cut in August – the first reduction since the start of the Covid-19 pandemic in early 2020. UK inflation has been falling since it peaked at 11.1% in October 2022. But the decline could reverse after a rise in Ofgem’s energy price cap for households.

Meanwhile, the UK economy returned to growth in August, with GDP expanding by 0.2% after flatlining in June and July. This growth, alongside cooling inflation and the prospect of lower borrowing costs, has bolstered consumer confidence.

The rise in annual earnings for employees in Britain has dipped below 5% for the first time in over two years, narrowing the gap between wages and inflation and raising the chances of another interest rate cut.

Wage growth slowed slightly, with average earnings rising by 4.9% in the three months to August, down from 5.1% in the previous quarter. The labour market showed signs of cooling as well, with payrolls shrinking by 15,000 in August, following a 35,000 decline in July. The unemployment rate edged down from 4.1% to 4%.

US stocks reach new highs

With Americans preparing to vote for the presidential election, Wall Street reached new highs, driven by gains in tech stocks and positive US economic data. Meanwhile, mounting uncertainty surrounding the US presidential election, combined with strong economic data have also put bonds under pressure and driven yields higher. The earnings season also began well, with banks reporting better-than-expected results.

US inflation dropped to 2.4% in September, the lowest year-on-year increase since February 2021. It marks the sixth consecutive month the annual headline rate has fallen and raises expectations the Federal Reserve will cut interest rates by a quarter point at its next meeting in November.

With inflation slowing and the economy still growing, despite a period of high interest rates, it looks increasingly likely that the US is heading for a soft landing – where inflation falls without causing a recession.

Hiring in September was much stronger than expected, with 254,000 jobs added. Unemployment also fell to 4.1% from 4.2% in August. US retail sales rose more than anticipated in September, suggesting the economy continued to expand robustly during the third quarter. Consumer spending remained steady, with retail sales rising 0.4% after a modest 0.1% increase in August.

ECB lowers rates

European markets rose after the European Central Bank (ECB) reduced interest rates for the third time this year. With inflation easing across the 20-member euro area, the ECB lowered its key deposit rate by 0.25%, bringing it to 3.25%. This follows a similar rate cut made in September to reduce borrowing costs.

In September, average inflation across the region dropped to 1.8%, below the ECB’s 2% target, while core inflation, which excludes volatile items like energy, stood at 2.7%. ECB President Christine Lagarde said the unexpected inflation fall meant a rate cut was needed to help steer the economy toward a soft landing.

Hopes of a consumer spending recovery becoming the driving force of growth in the euro area have faded. Germany is on the brink of recession, while growth in France has fallen after the boost of the Olympics.

Italy’s better-than-expected recovery from the inflation shock of the last two years has petered out, with only Spain showing a degree of resilience while interest rates have remained high. There were some signs of life though, with industrial output expanding and lending demand rising.

China’s rally fizzles out

China's stock market rally lost momentum as Beijing's attempts to boost the economy fell short of expectations. The country recorded its slowest growth in 18 months, with GDP rising 4.6% year-on-year in the three months leading up to September. This marked a slowdown from the previous quarter and is below the government's 5% growth target.

Amid an economy weighed down by weak domestic demand and a property market debt crisis, export momentum had been the one bright spot. However, export growth has slowed more recently and the volume of imports has also fallen.

There was some good news after China reported better-than-expected retail sales and industrial production for September. Retail sales grew 3.2% from a year ago, while industrial production expanded 5.4%.