Weekly Market Update - 24th September 2024

Investors began the week digesting news of a second assassination attempt on Donald Trump, but otherwise all eyes were looking towards the US Federal Reserve and whether it would cut interest rates for the first time in more than four years. In the run-up to Wednesday’s announcement, market bets implied a more than 60% chance of a half point interest rate cut.

Countering those bets was news that US retail sales unexpectedly rose in August on the back of strong online purchasing. July’s figures were also better than initially thought. Combined with a rebound in manufacturing production, and unemployment levels at historic lows, the figures suggested the US economy was still ticking along nicely, dampening the case for more aggressive easing.

But the Fed decided otherwise, suggesting it is concerned about the prospect of a weakening economy, and announced a supersized half-point cut in borrowing costs. The last time it cut by more than a quarter point was in 2020 when Covid-19 was ripping through the global economy.

Chair Jerome Powell expressed confidence in the US economy, saying that he saw no sign of recession and citing solid growth, lower inflation, and a solid labour market. Markets are now fully pricing in another cut of at least 25 basis points at the Fed’s next meeting in November.

Optimism about a soft landing for the US economy saw global stocks jump in the aftermath of the announcement. The MSCI World index closed at a record high on Thursday and was joined by the S&P 500, with new benchmarks hit in Australia and Indonesia. The latter had moved before the Fed to cut interest rates by a quarter point. Lower US rates should give other emerging markets the leeway to cut their rates to support growth.

So, what might the Fed’s move mean for investors? A raft of geopolitical and other risks could yet throw markets off track, but an important takeaway is that monetary policy easing cycles (rate cuts) are broadly favourable for equities, particularly in a non-recessionary period. Data going back to 1970 shows that, when there is no accompanying recession, the S&P 500 has averaged an 18% gain in the year following a first rate cut by the Fed. Time will tell, but such uncertainty underlines the importance of maintaining a diversified investment approach that can capture the potential of global economies and markets at various stages in the cycle.

The Bank of England and Bank of Japan were among other central banks making interest rate decisions last week. Before the BoE’s announcement came news that UK inflation held steady in the year to August at 2.2%, despite a pickup in price growth in the services sector. The figures boosted the view that the BoE would keep rates unchanged.

That view proved correct as the Bank’s Monetary Policy Committee voted 8-1 to keep rates on hold. Striking a more cautious tone about cooling inflation than his Fed counterpart, Governor Andrew Bailey suggested the BoE should be able to cut rates gradually in the months ahead, but said it expected inflation to rise to around 2.5% by the end of the year.

But the challenges to the UK economy remain. Following the BoE announcement came news that government borrowing in August rose to its highest monthly level since the pandemic in 2021. The increased borrowing saw national debt rise to 100% of the UK annual economic output – a level last seen in the 1960s. The news added to the pressure on the government ahead of October’s Budget, which Prime Minister Keir Starmer has already warned will be “painful”.

A survey published on Friday suggested those gloomy warnings and the likely need for tax increases are behind a plunge in UK consumer confidence this month, which has dropped to a six-month low. There was more positive news on retail sales, but the new government’s economic growth ambitions are undoubtedly under pressure already.

The Bank of Japan also held rates steady at the end of the week, but provided a more upbeat assessment on private consumption, signalling its confidence that an economic recovery was on track and would allow it to raise interest rates again in the coming months. Those expectations were heightened on news that core consumer inflation accelerated for the fourth straight month in August.

Asian stocks extended their rally on the news, although China was an outlier, as it unexpectedly left benchmark lending rates unchanged despite the raft of weak economic data. However, investors continue to believe that further stimulus is on the way. The Fed’s move should provide more scope for Beijing to ease policy without over-pressuring its currency