Financial Bulletin – April 2024

Overview

As expected the Bank of England voted to keep interest rates on hold at its latest meeting.

However, unlike at the previous meeting when two members had voted for a rate rise, there were no votes for a rise and one vote for a cut. Most commentators took this as a sign that a June rate cut is becoming increasingly likely.

Going in the opposite direction was the Bank of Japan which finally ended its 8-year negative interest rate policy.

Elsewhere the US economy continued to improve at a solid rate although there were several signs that the labour market is beginning to cool; something which the Federal Reserve will be looking at closely.

In the Eurozone the headline inflation rate fell to 2.6% and the core rate fell to the lowest since March 2022, before Russia’s invasion of Ukraine sent energy prices spiralling.    

Most stock markets continued to make consistent gains during March on the back of hopes that a serious recession has been avoided.   

Over the last 6 months the FTSE 100 returned 6.38%, the S&P 500 returned 22.95%, whilst the Euro Stoxx 50 returned 22.45%.

The Japanese Nikkei 225 returned 24.94% over the same period.

The broad emerging markets index returned 10.30% in US$ terms.

Both US and UK 10 year government bond yields fell over the last 6 months. During March the yield on US and UK government bonds began to diverge.     

US Economic News

There was very little expectation of an interest rate change during March. However, of more significance for the market was whether the Federal Reserve would change their forecasts for the rest of the year.

In the event, the Central Bank broadly maintained their view that three cuts will be needed during 2024.

Whilst the headline inflation rate ticked up slightly, from 3.1% to 3.2%, there were some signs that the labour market is beginning to lose some steam.

The unemployment rate rose to 3.9%, which is the highest since the start of 2022, whilst at the same time the number of people voluntarily leaving their job, fell.

If this trend continues then it is likely to reduce inflationary pressure in the coming months.    

More broadly, the US economy continued to improve at a solid pace. The latest surveys pointed to an impressive rate of growth in the first quarter of the year and companies reported a high level of confidence about the future. 

UK Economic News

The two members who had voted for an increase in interest rates during February changed their vote to ‘no change’ during March.

This means that no policymakers are now advocating a rate rise and the vote change was taken as a signal that a cut to interest rates in June is increasingly likely.

The vote came after the OBR forecasted that, due to the reduction in energy prices, inflation would fall below the 2% target in the coming months.  

This forecast was given further credence by the fact that the labour market cooled slightly as the unemployment rate rose and wage growth fell.

More broadly there was further evidence that the UK economy is likely already out of recession – the latest surveys pointed to growth in both the manufacturing and services sectors.

That said, the economy is estimated to be growing at a fairly anaemic rate of around 1% annualised compared to the 2% being witnessed in the US.

Eurozone Economic News

There were increasing signs that inflationary pressure is disippating within the Eurozone.

The headline rate of inflation fell to 2.6% in February on the back of further energy price falls.

Perhaps more importantly, however, is that the core inflation rate, which strips

out the most volatile elements, fell to the lowest level since March 2022. Therefore core inflation is essentially back to where it was, before the invasion of Ukraine saw inflation surge.

The much better inflation outlook is putting pressure on the European Central Bank to begin cutting interst rates.

During the month, the Governor of the Bank of Italy claimed that a consensus on the need for rate cuts is emerging within the ECB.

After deteriorating for much of 2023 the latest surveys suggested that the region’s economy is at least stabilising.

The manufacturing sector has endured a significant and prolonged downturn, as a result of the German economy’s reliance on Russian energy.

However, the Eurozone’s manufacturing sector is estimated to have contracted at the slowest rate for 11 months during March.

Taken together with the growing services sector and the overall economy was essentially flat during March.

Wider Economic News

During the month the Bank of Japan finally ended its 8-year negative interest rate policy, moving its key interest rate from -0.1% to 0.0%.

Perhaps more eye-catchingly it is the first time the BoJ has raised rates since 2007.

The move came on the back of the fastest pay growth since 1994; the BoJ has become increasingly confident that inflation will move sustainably higher.

Elsewhere, in China, it became increasingly clear that Xi Jinping sees the solution to the current economic problems as even more manufacturing, particularly high-end manufacturing.

This plan could have a significant impact on global inflation but is likely to face push-back from the US and EU in the form of tariffs.    

Financial Markets and Corporate News

Most stock markets had another solid month during March. The S&P 500 hasn’t fallen by 2% or more during a single day since October – the longest such streak in more than 5 years.

However, there were the first signs of the US rally broadening out as the S&P 500 rose despite several members of the ‘magnificent 7’ faltering.

Over the last 6 months the FTSE 100 returned 6.38%, the S&P 500 returned 22.95%, whilst the Euro Stoxx 50 returned 22.45%.

The Japanese Nikkei 225 returned 24.94% over the same period.

The broad emerging markets index returned 10.30% in US$ terms.

The Investment Association (IA) UK Gilts sector returned 6.49% over 6 months, whilst the IA Sterling Corporate Bond sector returned 8.15% and the IA Sterling High Yield sector returned 7.68%.

Summary of Key News:

  • The BoE seems to be positioning for a first rate cut in the coming months.
  • The Bank of Japan ended its 8-year negative interest rate policy.
  • Eurozone core inflation is at its lowest in two years.
  • The US economy continued to improve at a solid rate, despite a marginally cooling labour market.
  • The UK economy is likely already out of recession.
  • Xi Jinping seems to be intent on ramping up Chinese manufacturing.

Financial Markets:

  • Most stock markets made solid gains during March.
  • Some of the large US companies which make up the ‘magnificent 7’ began to falter.
  • Over 6 months the FTSE 100 returned 6.38%, the S&P 500 returned 22.95%, and the Euro Stoxx 50 returned 22.45% (total return).
  • The Japanese Nikkei 225 returned 24.94% (total return).
  • The broad emerging markets index returned approximately 10.30% (in US$ terms).
  • The   IA UK Gilts sector returned 6.49% over 6 months, whilst the IA Sterling Corporate Bond sector returned 8.15%, and the IA Sterling High Yield sector returned 7.68%.

Outlook

The news coming out of China could have a very significant impact on the world economy but is likely to be long term in nature.

A large ramp-up in lower cost Chinese goods could result in a similar situation to the early 2000s when inflation across the developed world was low and consistent. Conversely, if Xi’s plan results in tariffs and trade wars then there is likely to be more volatility.

March further highlighted the divergence between the US on one hand and the UK and Eurozone on the other. 

Whilst headline inflation in both the UK and Eurozone is expected to fall below, or at least be very close to, the target level in the coming months US inflation seems to be stubbornly just above target.

The strength of the US economy is due in no small part to the significant fiscal stimulus in place over the last few years. Given this is an election year there is very little prospect of spending being reined in any time soon.

As a result we can expect the BoE and ECB to be forced to move faster on rate cuts than the Federal Reserve. 

Whilst economists focus on future interest rates, the world equity market seems to keep griding higher, regardless.

During March there were the first signs that the rally in US equities is ‘broadening out’ rather than being focused on a handful of large technology companies.

This is important as, ultimately, if the equity market rally is to be sustained, it cannot rely solely on a few companies indefinitely.