Stock Take

After the risk-off mood in October, world markets have staged a strong recovery so far this month, as investors increased their bets that the major central banks have ended their lengthy run of interest rate hikes.

Last week was packed with events that could have put a big dent in investors’ confidence. As it turned out, they cheered the news.

Markets meandered at the start of the week ahead of Tuesday’s much-anticipated news on US consumer prices. World stocks leapt as a drop in petrol prices helped to drive US inflation to its lowest rate since July. Prices increased at an annual rate of 3.2%, down from 3.7% a month earlier. Housing costs, which include rent, hotel rates and house insurance, remain a trouble spot, climbing 6.7% over the last 12 months.

But overall price pressures were milder than analysts had predicted, adding to hopes that the country’s fight against inflation is nearly over.

Expectations that the US Federal Reserve is done with hiking interest were strengthened on Wednesday as data showed US retail sales fell for the first time in seven months in October. However, the drop was less than expected and followed three straight months of hefty gains. US producer prices also saw their biggest decline in three and a half years, adding to signs of a cooling US economy, although there is no sign yet that it is sliding into recession.

Investors are now expected to turn their attention to when the Fed might start to cut rates. Analysts pointed out that in the soft landing for the US economy in 1994-1995, the pause only lasted five months before rates started to come down. US interest rates have been on hold since July.

Markets were also boosted by more positive news on China’s economy. Retail sales grew by a better-than-expected 7.6% last month and industrial output also picked up faster than predicted. The retail news came after lacklustre sales at the annual Singles Day shopping festival over the previous weekend, as fatigued consumers kept their hands in their pockets. Tellingly, China’s top two online retailers – Alibaba and JD.com – withheld their full sales data for a second straight year. Last year was the first time details had been held back in the shopping holiday’s 15-year history.

The property sector remains a weak spot. Real estate and related sectors account for around a quarter of China’s GDP, and news that investment into the sector fell 9.3% from a year ago added to evidence that property is continuing to drag down the economy.

There was also good news on UK inflation, which fell sharply in October to its lowest rate in two years. Consumer prices rose at an annual rate of 4.6%, down from 6.7% the month before.

“While the inflation drop to below 5% will be hailed as a major milestone in progress towards the Bank of England’s 2% target, the UK remains one of the highest inflation economies,” commented Hetal Mehta, Head of Economic Research at St. James’s Place. “Core inflation is still stubbornly sticky at 5.7%. The next phase of inflation reduction will almost certainly be more painful for the economy, as the easy wins on energy are now largely behind us.”

“While interest rate increases may have subsided, the pass through of the interest rate hikes to date should keep investors cautious about the UK outlook.”

Inflation readings in Italy and France also receded to an annual rate of 1.8% and 4.5% respectively. However, the headwinds created by high inflation and record high interest rates have taken their toll on the eurozone economy. The European Union’s statistics office confirmed its estimate that the eurozone economy shrank marginally in the third quarter, underlining expectations of a technical recession if the final quarter turns out equally weak. Yet employment rose in the quarter – an unusual trend for a weakening economy.

Despite the likelihood of recession, a Reuters poll of economists forecast that the European Central Bank’s first interest rate cut will have to wait until July next year.

The benign inflation readings in the US and across Europe pushed world stocks to a two-month high. The MSCI World Index and S&P 500 have climbed more than 7% so far in November.

Whilst there was good news on inflation, the end of the week brought further evidence of the UK’s economic challenges as official figures showed retail sales in October slumped to their lowest level since the lockdowns of February 2021. The Office for National Statistics said consumers were continuing to prioritise essential spending and emphasised the impact of the bad weather that kept shoppers at home.

The Government’s latest plans for kick-starting the UK economy will be revealed in this week’s Autumn Statement.

Wealth Check

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Many small and medium business owners spend a long time planning to exit their business, but it can often be a longer and more complicated process than expected. Speak to us and we can help make sure all your plans fit together and match your personal life objectives, including tax and investment planning.

In The Picture

Last week revealed both inflation in both the US and UK fell. That said, it remains above the 2% target, and central banks have been clear they do not view the battle against high inflation as over.

The Last Word

“I’ve decided to join this team because I believe Rishi Sunak is a good prime minister doing a difficult job at a hard time…I want to support him”

David Cameron on his surprise return to Government last week.

Past performance is not indicative of future performance.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2023. FTSE Russell is a trading name of certain of the LSE Group companies.

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Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP Approved 20/11/2023