With the US election and key central bank meetings out the way, this week still had a raft of economic data for investors to sink their teeth into.
Following on from the US Federal Reserve cutting interest rates last week, a range of US inflation data was released this week. Headline inflation picked up from 2.4% to 2.6%, which was in line with expectations. Housing costs (rent), air fares and used cars all contributed to inflation, while gasoline prices dropped. Core inflation (excludes food and energy prices) remained steady at 3.3% and will no doubt cause concern for the US Fed, given its elevated level. The combination of inflation data, coupled with words from Fed Chair Jerome Powell led to markets lowering the probability of an interest rate cut in December from 80% to 60%. US government bonds have been weak over the last six weeks and the inflation data did little to reverse this trend. The yield on the 10-year US treasury bond is now approaching 4.5%, as investors grow concerned around the inflation outlook for the US, coupled with significant fiscal spending. The trend has not been unique to the US, with UK government bonds also having a soft patch in recent weeks. Government bonds have continued to exhibit high levels of volatility since 2022, yet at current yield levels, offer the prospect of inflation beating returns.
The UK was in the spotlight this week with Chancellor Rachel Reeves speaking in her Mansion House address, her first speech to prominent business leaders and financiers. It is clear that Reeves is keen on removing some of the regulation and red tape that has potentially held back investment and growth. She stated, “The UK has been regulating for risk, but not regulating for growth”. She also announced considerable pension reform, aiming to create less, but much larger pools of pension capital which can be deployed into infrastructure and private markets. While there was limited mention about public market reform, this could be announced in 2025, with the aim of stemming outflows from UK equities.
There was disappointing news for the Chancellor to wake up to on Friday morning with UK GDP data underwhelming. For the third quarter of 2024 the UK economy only grew by 0.1%, with GDP falling by -0.1% for the month of September. The data was below expectations, with the uncertainty created by the autumn budget deemed as a significant reason for the lacklustre growth. Despite the data, the market is still viewing an interest rate cut in December as unlikely, with the likelihood of the next cut being delivered in February 2025.
Staying with the UK, employment and wage data was also released this week. Average earnings index, which tracks the change in prices businesses and governments pay for labour, including bonuses, rose more than expected to 4.3%. This level of wage growth is above current inflation levels and should help support consumption in the economy. Despite wages rising faster than expected, the unemployment rate surprisingly jumped to 4.3%, from 4.1%.
After a strong run, gold has stumbled this week, falling below $2,600 an ounce, a likely unwind of pre-election hedges. It’s not the only weak commodity, with brent crude oil slipping to $72 a barrel this week.
At a currency level the recent trend of US dollar strength prevailed throughout the week. The USD:Yen rate is back above 155, while sterling dipped below 1.27 against the greenback on Friday, its lowest level in over three months.
The “Trump Trade” has gotten into its swing as Bitcoin has hit a historic high of $88,000, rallying almost 30% since election day. This has been fuelled by investors anticipating a more favourable regulatory environment for cryptocurrencies. Tesla shares have risen almost 25% in the same period as CEO, Elon Musk, was announced head of a new department, Department of Government Efficiency. The acronym “DOGE” is already raising eyebrows but his role entails slashing excess regulations, cutting wasteful government expenditure and restricting federal agencies.
Looking ahead to next week, UK inflation data will be one to watch. Headline inflation is expected to rise to 2.2%, from the current level of 1.7%, in part due to the increase in the energy price cap at the start of October.
Andy Triggs, Head of Investments
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