UK Festive Cheer
Hard on the heels of the meeting of the Federal Reserve on 10 December, which saw US rates cut a further 0.25% to 3.5-3.75%, last week saw meetings of the European Central Bank, Bank of England and Bank of Japan. The BOE lowered rates another 0.25% to 3.75% while the ECB left rates unchanged at 2.0% and the BOJ raised rates by 0.25% to 0.75%.
None of the moves came as any surprise and the markets overall gave a collective yawn in response. Bonds were little changed over the week as were global equities. Indeed, the Santa rally has been largely absent this year with global markets up fractionally so far in December in local currency terms and down slightly in sterling terms. But given the size of the gains seen earlier this year, the absence of festive cheer can perhaps be forgiven.
Somewhat surprisingly given the pervading domestic gloom, UK equities were the one market to show some Xmas spirit last week. They were up a sizeable 2.5%, helped by a strong performance from the banks. European equities also managed a gain of 0.9% in sterling terms whereas US equities were flat and emerging markets were down 1.6%, unwinding a further part of their outperformance over the autumn.
Last week was very much a week of two halves with equities retreating in the first half and recovering in the second. The initial declines were down to continuing angst over a potential bubble in AI-related stocks with disappointing results from a couple of the tier two AI players – Oracle and Broadcom – fuelling these worries. As for the subsequent rebound, it was down to the spate of US economic data being released now the government has re-opened.
Most notably, and most dubiously because of distortions caused by the failure to collect any October numbers, US inflation saw a marked and unexpected decline in November. The headline rate fell from 3.0% to 2.6% and the core rate from 3.0% to 2.7%. Rightly, or more likely wrongly, these numbers are likely to increase pressure on the Fed to continue cutting rates next year.
This is despite further signs that economic activity in the US continues to hold up considerably better than expected. Retail sales posted a larger than forecast gain in October and payrolls were also a bit stronger than anticipated in November. Meanwhile, the GDP numbers out tomorrow are likely to show growth running at a seemingly healthy 3% pace in the third quarter.
Here in the UK, the growth picture is decidedly more downbeat. GDP fell 0.1% in the three months to October and retail sales disappointed in November, failing to recover any of their October decline – no doubt depressed by the gloom ahead of the Budget.
Rather more encouragingly, inflation came in lower than expected in November. The headline rate dropped from 3.6% to 3.2% and the core rate from 3.4% to 3.2%. Private sector wage growth also slowed further in October to 3.9% as employment continues to decline slowly.
Despite the better inflation news, the BOE decision to cut rates was a close call with five members of the MPC voting for a rate cut and four for no change. The Bank also turned more cautious about the prospect for further rate cuts due to continued inflation risks and the fact that rates are now back down close to a neutral level. Even so, rates still look most likely to be reduced by a further 0.5% to 3.25% over the first half of next year.
As for the ECB, it has kept rates unchanged since June, now rates are back down to 2% and broadly in line with their neutral level, and looks set to remain on hold for the foreseeable future. Last but by no means least, the BOJ rate hike was the first since last January and the Bank is likely to continue raising rates very slowly back to more appropriate levels now inflation is running at around 3%.
The coming two weeks are unsurprisingly rather light on data with tomorrow’s third quarter US GDP numbers likely to be the main highlight.
We will return in the New Year with our thoughts on the year gone past and the year ahead. In the meantime, may I wish you on behalf of Kingswood a Merry Christmas and Happy New Year.
Rupert Thompson – Economist