Market Review 16th September 2024

Everything you need to know, Simplified!

Markets last week

Summary

• There was a partial recovery in equity markets, led by US tech stocks, with cyclical sectors outperforming

• Bond markets performed well as yields declined across the developed world

• The European Central Bank (ECB) implemented its second interest rate cut, with another cut anticipated in December

• In the UK, weaker-than-expected industrial and manufacturing output led to a decline in gilt yields

• US equities rebounded 4%, driven by technology stocks, despite a slightly hotter-than-expected August Consumer Price Index (CPI)

• Concerns in US real estate resurfaced, with rising delinquency rates and record-high office vacancy rates affecting regional banks

• Despite these concerns, the US economy demonstrated broader resilience with record-high employment levels across multiple industries

• This week, the Federal Open Market Committee (FOMC) in the US is expected to cut rates for the first time in the cycle, likely favouring a 25 basis point (bp) reduction

• Bank of England (BoE) is anticipated to hold rates steady, preferring a gradual approach to policy easing

• The hawkish Bank of Japan (BoJ) are likely to hold rates steady while assessing the case for further policy tightening.

  
  

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Markets last week

Market environment

Equity markets saw a partial recovery in a relatively quiet week, with US tech stocks spearheading the rebound. Cyclical sectors outperformed, although the contribution was broad based. Bond markets continued to perform well, as yields declined across the developed world. The ECB implemented its second rate cut, while new inflation data from the US increased the likelihood of a smaller 25bp, rather than a larger 50bp reduction at this week’s FOMC meeting.

United Kingdom

Economic developments in the UK favoured the bond market as industrial and manufacturing output in July was weaker than anticipated. UK gilt yields fell with the ten-year gilt declining 0.12% to close at 3.77%. Equity markets were stable with mid-caps mildly outperforming large-caps. Sector performance was broad based, although cyclical sectors such as materials, real estate and industrials performed well while healthcare lagged.

United States

US equities rebounded 4% following a sharp decline at the start of the month. Technology stocks performed best, having led declines the previous week. US (Consumer Price Index) CPI data for August was slightly hotter than expected, tilting the odds in favour of the FOMC opting for a 25bp cut over a more significant 50bp reduction. Markets are anticipating a substantial rate cutting cycle with Fed Fund futures (a gauge of market expectations about the Federal Reserve’s action at future FOMC meetings) pricing in ten cuts by the end of next year implying a base rate of 2.84%.

The market has ramped up bets on interest rate cuts as the US economy has shown signs of deceleration. Recently concerns surrounding the real estate sector have resurfaced as data in August reported a sharp rise in delinquency rates, particularly in multi-family, office and retail segments. Simultaneously, office vacancy rates are at the highest levels in history raising concerns around the US regional banking sector which holds the majority of US commercial real estate debt.

Despite these concerns, the overall state of the US economy appears resilient, with (according to Yardeni Research) employment levels at record highs across multiple industries, including ambulatory health care, construction, finance, food and service, leisure and hospitality, and professional and business services.

Europe

The ECB cut its deposit rate from 3.75% to 3.5%, marking its second rate cut. This move is unlikely to be its last, with the market anticipating another cut in December. While inflationary pressures are easing across the eurozone, policymakers prefer a more gradual easing cycle due to ongoing concerns about price pressures in the services sector and the continued pace of wage growth. European equities rebounded, led by cyclical sectors such as technology, industrials, and materials.

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The week ahead

Wednesday: FOMC rate decision

Our thoughts: The FOMC is expected to cut interest rates, but the magnitude of the cut is up in the air, with relatively even chances of a 25 or 50bp cut. The fact that inflation was a little bit hotter than anticipated in August tilts the odds marginally in favour of a 25bp reduction.

Additionally, the FOMC will release its quarterly Summary of Economic Projections, providing insights into key economic indicators and the future path of monetary policy. Given the recent softening of economic momentum since June, this report will be a crucial indicator of any shifts in the FOMC’s outlook and policy stance.

Thursday: BoE rate decision

Our thoughts: The BoE rate decision comes the day after UK CPI inflation data for August. Inflation is anticipated to have risen, but this is not expected to sway the BoE from their second interest rate cut, likely favouring a more gradual approach to policy easing. The market is pricing the next cut for the November meeting.

Friday: BoJ rate decision   

Our thoughts: The BoJ are expected to hold rates steady. Wage growth and inflation data may support a further hike, due to concerns over an economic slowdown in the US and the potential to trigger a further unwind of yen carry trades. The policy board are likely to err on the side of caution looking ahead to further policy tightening in future meetings.

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