Weekly Markets Review | 23 September 2024

By Thomas Hibbert, CFA

Summary

• The US Federal Reserve (Fed) cut rates by 0.5%, the first cut in four years, which counterintuitively led to higher bond yields
• The Bank of England (BoE) held rates steady, with Governor Andrew Bailey emphasising a gradual approach to easing
• US equities hit a new all-time high, with small caps and cyclical sectors outperforming
• European equities saw small gains, but weakness in the euro led to losses in sterling terms
• UK equities fell 0.5%, impacted by poor performance in healthcare and interest rate-sensitive sectors
• Chinese equities rose, buoyed by the Fed’s rate cut despite disappointing economic data
• The Bank of Japan (BoJ) held rates steady, with Governor Kazuo Ueda suggesting the pause in rate hikes may extend beyond October
• The People’s Bank of China (PBOC) is expected to hold rates steady, with further easing anticipated in Q4
• Inflation in Tokyo is expected to remain elevated, keeping the BoJ on the path for policy normalisation
• US Core PCE inflation is expected to remain consistent with July’s reading, in line with the Fed’s 2% target.

Markets last week

The Fed

The highlight of the week was the Fed’s decision to cut rates by 0.5%, their first cut in four years, and double the usual 0.25% increment. Speculation was rife about whether the cut would be 0.25% or 0.5%. Both bond and equity markets initially responded positively. However, Fed Chairman Jerome Powell was cautious during the press conference, emphasising a balanced economic outlook and ensuring that markets shouldn’t infer from the larger cut that a faster easing cycle was coming.

Bond yields rose, with the US ten-year yield ending the week at 3.74%.

The Bank of England

As expected, the BoE held rates steady, highlighting a gradual approach to easing. Governor Bailey stressed the need for caution but was optimistic about future cuts as inflationary pressures ease. August inflation data was broadly in line with expectations, with headline inflation unchanged but core inflation rising. Services inflation rose to 5.6%. Strong retail sales data supported the growth outlook. These factors saw UK gilt yields rise, with the ten-year yield closing at 3.9%.

Equities

The US equity market hit a new all-time high, with broad performance and small caps outperforming large caps. Cyclical sectors like communication services, energy, consumer discretionary, industrials, and materials outperformed. European equities saw small gains, but euro weakness translated to losses in sterling terms. UK equities fell 0.5%, driven by poor performance in healthcare and interest rate-sensitive sectors like real estate and utilities. Year-to-date, UK equities remain ahead of most regional markets in GBP terms.

China

Chinese equities rose in a week shortened by a holiday - buoyed by the Fed’s rate cut. This was despite disappointing economic data. Mainland Chinese equities rose 1.3%, while Hong Kong equities surged 5.1%. August data highlighted slowing economic momentum, with industrial production and retail sales missing forecasts and property investment falling 10% year-on-year. Economists expect further easing measures, with the Fed’s rate cuts providing more room for China to cut rates.

Bank of Japan

The BoJ held rates steady as anticipated. Governor Ueda’s cautious tone suggests a pause in rate hikes may extend beyond October, with January now looking more likely for any move. Ueda highlighted the need for more clarity on the US economic outlook, balancing domestic pressures like rising wages and CPI. This cautious approach indicates Japanese policymakers may tolerate higher inflation for a bit longer. The direction seems clearer, with a withdrawal of quantitative easing in Japan and US rate cuts likely leading to higher Japanese government bond yields and a stronger yen.

The week ahead

Wednesday: PBOC rate decision

Our thoughts: The PBOC is expected to hold its medium-term facility rate steady having cut it by 0.2% in July. Further easing is expected in Q4 however, given the sluggish pace of the Chinese economy.

Friday: Tokyo inflation

Our thoughts: Price pressures in Tokyo are anticipated to remain elevated, driven by strong wage growth. This dynamic should keep the BoJ on the path for further policy normalisation.

Friday: US core PCE inflation

Our thoughts: Core PCE inflation, the Fed’s favoured inflation gauge, is expected to remain consistent with July’s reading and in-line with the Fed’s 2% target. The year-on-year reading is anticipated to rise although driven by unfavourable base effects (older data dropping off the 12-month calculation period).

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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. Where investment is made in currencies other than the investor’s base currency, the value of those investments, and any income from them, will be affected by movements in exchange rates. This effect may be unfavourable as well as favourable. Past performance and future forecasts figures are not a reliable indicator of future results.