Investment commentary covering October 2024

Inflation continues to cool as stock markets hit fresh highs

US heading for a soft landing

With inflation slowing and the economy still on solid ground, it looks increasingly likely that the US is heading for a soft landing – where inflation falls without causing a recession. Hopes of this happening have been bolstered after jobs growth in the US economy surged and unemployment fell as the Federal Reserve cut interest rates for the first time in four years in September.

Inflation continues to recede globally and the fight to bring down price rises is nearly over. Central banks are lowering interest rates and there are hopes of more cuts before the end of the year. The global economy has managed to avoid falling into recession, despite record interest rates. However, escalating violence in the Middle East and the prospect of a new round of trade wars with China remain significant threats.

Markets hit fresh highs

With the US presidential election taking place, Wall Street reached fresh highs, boosted by gains in the tech sector and upbeat economic data. Mounting uncertainty surrounding the 5 November US Presidential election, combined with strong economic data has put US bonds under pressure and driven yields higher. Benchmark 10-year UK government bond yields – which move in the opposite direction to prices – have also risen.

The earnings season kicked off on a high note, with banks reporting results that exceeded expectations. Meanwhile, a stock market rally in China has lost momentum as an eagerly awaited announcement on boosting the struggling economy fell short of investor expectations. Shares had surged over 10% when trading resumed after the Golden Week holiday, only to slip back after a news conference from the country’s economic planners.

Labour raises taxes by £40 billion

The UK’s new Labour government unveiled a debut Budget plan that includes £40bn worth of tax rises. The changes included a hike in National Insurance for employers, increases in Capital Gains Tax rates and the introduction of inheritance tax on pensions. Meanwhile, Britain’s economy returned to growth in August after flatlining for two consecutive months, with manufacturing and construction rebounding strongly.

In welcome news for millions of families, inflation fell to its lowest level in three and a half years, dropping sharply to 1.7%. UK consumer confidence picked up in October, buoyed by strong wage growth and easing inflation. Annual pay growth has fallen below 5% and in a sign of a slowing labour market, the unemployment rate also nudged down.

ECB cuts rates again

The European Central Bank (ECB) cut rates for the third time this year, saying that while inflation is under control, the outlook for the economy is worsening. The region’s average inflation rate fell to 1.8% in September, coming in below the ECB’s 2% target. Business activity contracted again in October. Manufacturing remains in a slump, while the bloc’s dominant services industry slipped again.

Germany is on the brink of recession, while growth in France has fallen after the boost of the Olympics. Italy’s recovery has also stalled, with only Spain showing significant growth. Employment figures further reflect economic strain, with workforce reductions across the region for the third consecutive month, marking the fastest decline since late 2020. Though consumer confidence has been shaken by the pandemic and energy crisis, lower interest rates should encourage spending.

US economy still going strong

The US economy remains in good shape. Growth is strong, unemployment is low and inflation is back down. Business activity continues to grow at an encouragingly solid pace, sustaining the economic upturn. US inflation fell to 2.4% in September, the sixth consecutive month annual headline inflation rate has fallen. US retail sales also rose more than expected, suggesting robust economic growth in the third quarter. While labour market momentum has slowed, layoffs remain historically low, supporting wage increases.

Strong US jobs data has prompted investors to scale back their expectations for Federal Reserve rate cuts. The US dollar also rallied to its highest level since August, boosted by robust economic data. Meanwhile, the presidential contest remains a statistical dead heat, both nationally and in the battleground states.

Japan’s snap election backfires

Japan's ruling coalition, led by the Liberal Democratic Party (LDP), has lost its parliamentary majority, resulting in a shock election outcome that leaves the country in political limbo. No party secured enough seats to gain a clear mandate, marking a significant setback for the party’s new leader Shigeru Ishiba. The election came amid widespread public anger over a corruption scandal and growing discontent regarding the state of Japan's economy.

The Bank of Japan decided to keep interest rates unchanged. Japan’s consumer price inflation increased at 2.4% in September, down from 2.8% in August. Additionally, exports fell for the first time in 10 months, while imports increased. The Japanese yen also fell sharply as investors anticipate a slower pace of interest rate hikes from the Bank of Japan.

China’s slowdown deepens

China posted its lowest economic growth in a year and a half as it continues to struggle with the lingering side-effects of the pandemic and the collapse of its property sector. Growth is being hindered by sluggish domestic spending, raising concerns of potential deflation. In response, the world’s second-largest economy has announced its most significant benchmark lending rate cuts in years, aiming to bolster economic activity and reach its year-end GDP growth target of around 5%.

In an effort to revitalise its lagging economy, Chinese authorities unveiled a series of support measures in September, including reducing the required reserve ratio for banks. Export growth slowed sharply in September, while imports edged up slightly but were down on the previous month. However, there was some good news after China reported better-than-expected retail sales and industrial production for September. China’s urban unemployment rate also fell slightly.

Looking ahead to lower rates

The US economy is set to drive global growth through 2024 and 2025, fuelled by strong consumer spending, according to the International Monetary Fund (IMF). Its growth forecast for the UK economy this year was also revised to 1.1% – up from its earlier estimate of 0.7%. This comes after official figures showed a return to growth in August following two months of stagnation.

With the global battle against inflation largely won, central banks will continue to lower interest rates in the coming months. Markets expect the Fed to reduce rates by a quarter percentage point at its next meeting, although a larger reduction is possible, depending on economic data. While there may be some market volatility from the outcome of the US election, this is likely to be short-lived.

Thank you for reading and please look out for another update next month.

Ascot Lloyd Investment Team

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