Market news & UK interest rate

US markets were weaker yesterday.  The Dow Jones Industrial Average closed 34,070.42 -370.46 (-1.08%) while the Nasdaq Composite closed 13,223.98 -245.15 (-1.82%).

The yen slid after the BOJ left its monetary policy unchanged, capping a week of central bank decisions that have roiled financial markets.  Benchmark Treasury yields touched 4.5% for the first time since 2007 in a continued reaction to the Fed's hawkish projections for the path of interest rates. The pound weakened further on the BOE's decision to pause its campaign of hike  Chinese stocks rose as the nation mulls relaxing foreign ownership caps in listed local companies.

Chevron and labour unions agreed to end strikes at key LNG facilities in Australia that have roiled the global market. Workers accepted a proposed settlement on pay and conditions, resolving a dispute that triggered industrial action from Sept. 8 at the Gorgon and Wheatstone plants, which accounted for about 7% of worldwide LNG supply last year. European natural gas fell.

Microsoft got a huge boost in its attempt to clear its final global regulatory hurdle for the $69 billion Activision deal after the UK's antitrust watchdog said the revised deal offer from the tech giant appeared to address its concerns.

UK consumer confidence climbed to the highest in almost two years as wage growth started to outstrip inflation.  GfK's sentiment index rose 4 points to minus 21 in September, the highest since January 2022 — shortly before Russia's invasion of Ukraine. The survey found that British consumers are becoming more optimistic about the economy and their personal finances as the next general election comes into view.

Joe Biden vowed to Volodymyr Zelenskiy that he'd secure more US aid for Ukraine despite opposition from some Republicans. The pressures facing the Ukrainian leader were in evidence during his talks in the US this week. He pledged to continue the counteroffensive against Russian troops into the winter.

Source: Bloomberg

UK Interest Rate

Yesterday the Bank of England chose to leave rates unchanged after 14 successive hikes since December 2021, leaving the policy rate at 5.25%.  The decision was a marginal 5-4 vote with 4 members favouring a hike and Governor Andrew Bailey having the casting vote.

Markets were 50/50 before the vote after the positive news on inflation earlier in the week.  Markets still expect one more hike, but some forecasters have called the top in UK rates.  The pound reacted by softening on the foreign exchange markets, reaching its lowest level versus the US dollar since March.  The current Bank forecasts see inflation back to its 2% target by the second quarter of 2025.

“Inflation has fallen a lot in recent months and we think it will continue to do so.” Bailey said in his statement.  “That’s welcome news.  But there is no room for complacency.  We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”  Repeating its former guidance, the committee said rates would be “sufficiently restrictive for sufficiently long” and “further tightening of monetary policy would be required if there were evidence of more persistent pressures”.

There are growing concerns at the MPC about the faltering UK economy after a sharp contraction in July that was partially blamed on poor weather. They cut their third quarter GDP forecast from 0.4% to 0.1% and noted that the prior hikes were starting to bite.  The Bank of England is closely in step with the European Central Bank and The Federal Reserve who have both signalled they are at or close to the end of their hiking cycle.

Investors need to be careful.  It wasn’t that long ago that central banks were committing to keeping rates at or close to zero throughout 2023, before embarking on the most aggressive hiking cycle in decades.  Although they are doing their best, they really have no idea how the future will evolve.  What is clear, is that as the higher interest burdens feed through to government budgets, there will be some pointed questions, with debt levels where they are, as to whether these elevated levels of rates can be sustained.

Source: Bloomberg