I’m Neil Birrell, Premier Miton’s Chief Investment Officer. Thanks for reading ‘Market Watch’, our monthly summary of the key events in financial markets.
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October – in brief
• The major central banks left interest rates unchanged at their latest meetings.
• Inflation isn’t beaten, but it does appear to be in retreat.
• However, the outlook for economies and financial markets remains uncertain.
Central bank policy statements make compulsive reading
The idea of this summary is to provide a review of the key events in economies and financial markets for the calendar month. However, I delayed writing this one by three days as there were key events that might prove to be noteworthy on 1st, 2nd and 3rd of November and that proved to be the case. Therefore, it is appropriate to discuss them here.
Much has been made of central bank policy measures to combat inflation since it first went to the top of the agenda in the final quarter of 2021 and it has been front page news since then. It is not just the actions of the US Federal Reserve (Fed), the Bank of England (BoE) and the European Central Bank (ECB) that have been the focus, more the words and phrasing they have used in the accompanying statements and press conferences. The announcement from the Fed on 1st November was a case in point.
They left interest rates on hold as anticipated and their statement mentioned that they expected the prevailing policy measures to lead to a slowing of the economy and that they would be ready to act further if necessary to dampen inflation. All of that was to be expected, as was their cautioning against the perils of high inflation.
However, Jerome Powell, the Chair of the Fed, also hinted that we are close to, maybe even at, the end of the interest rate increases, which is exactly what investors have been craving. He would allow himself to make that statement, but it was a suggestion.
The touch paper was lit
Just as asset prices have been significantly impacted by rising interest rates, so they should by falling interest rates, or in this case the hope or expectation of them coming down. Bond prices have fallen severely as interest rates have risen and therefore jumped quite sharply after the Fed meeting. Similarly, company share prices rose, particularly those that are more sensitive to interest rates, such as property and utility companies.
It is to be seen if this carries on or not; there have been false dawns before. Keen eyes will be cast upon all the economic data releases, of which there are many, and fortunately we did not have to wait long, a mere 42 hours in fact. The US employment data was released on 3rd November, which showed that there were fewer jobs created in October than expected. This can be seen as a sign that the economy is slowing and supportive of the view that interest rates have peaked. The saga could continue for a while, but it’s a good read.
Near home and at home
The ECB also kept interest rates unchanged and the news on inflation in the region is quite encouraging as well. Given that the EU economy is not in such good shape though, it is possible we have hit peak interest rates there as well.
At home, the BoE followed suit on 2nd November and left interest rates where they were. However, the Governor, Andrew Bailey, said it is “much too early to be thinking about rate cuts”, but financial markets thought otherwise and rapidly reflected that. This was driven by fears that the UK economy is being damaged by the high interest rates already and recession is looming; inflation is still too high, wages are rising, unemployment is up, the housing market is showing signs of stress and the overall picture is not good. So, investors are starting to bet that interest rates will start coming down in the second half of next year. Cue the moves in financial markets noted above.
Again, time will tell what the outcome will be, but it is a fine line between a gently slowing economy, which would probably be good for financial markets and landing with a jolt, or recession, which may not be good for company profitability and share prices.
No longer the Apple of our eyes
Apple has been a stock market darling for a long time with a constant stream of new products that have been in high demand globally leading to soaring profits and share price.
It announced its fourth quarter profits on 2nd November which showed that revenues had fallen for the fourth quarter in a row. We shouldn’t feel too sorry for them though, revenues were still $89.5 billion in the 3 months.
What happened in October?
That’s October’s update written, only referring to events in the first 3 days of November! A lot happened in October, but events are fast moving. I wonder what I will be writing about next month.
