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Dovish delight?

6 Feb 2024 | 5 minutes to read

A good week for

  • US equities rallied over 2% in sterling terms
  • UK corporate bonds gained almost 1%

A bad week 

  • Oil reversed course, falling -7% in dollar terms
  • Sterling weakened around 0.5% against both the US dollar and the yen

UK monetary policy

The February meeting of the Bank of England’s Monetary Policy Committee (MPC) provided a key test of the strength of the Committee’s tightening bias. Back in December - at a time when US Federal Reserve (Fed) Chair Jerome Powell had acknowledged that the timing of interest rate cuts was “the next question” - the MPC stuck to its guns, with three members voting for further hikes and only one member concerned about the risk of overtightening. At the February meeting, there were key changes to the voting pattern, the interpretation of economic data, and the forecast.

Starting with the voting pattern, members shifted in a dovish direction, with only two votes for a rate hike, six for no change and one for a cut. While the Committee still judges that policy needs to be “restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipated”, the MPC also stated that it would keep under review for how long the Bank Rate should be maintained at its current level.

The Committee also appears to have greater confidence that the labour market is easing, confirming that “the restrictive stance of monetary policy was weighing on activity and was leading to a looser labour market”.

The February meeting was accompanied by updated forecasts in the Monetary Policy Report, conditioned on the path of interest rate cuts implied by the market. Notably, this path has shifted significantly since the last forecast, in November, with rates expected to be around one percentage point lower across the three-year forecast than was expected in November.

This lower rate path resulted in a forecast of Consumer Prices Inflation (CPI) that was above 2% in the final year of the forecast, failing to meet the MPC’s inflation objective. This suggests that markets are pricing in more rate cuts than Bank of England models would endorse. However, another model, which assumed rates remained unchanged, resulted in forecast inflation well below 2% at the end of the forecast. This confirms that MPC members recognise the need for cuts, but not to the extent currently priced by markets.

After the meeting, market-based measures of interest rate expectations pared back the scale of the rate cuts they had priced in somewhat.

With the next set of forecasts published in May, investors are currently looking at interest rate cuts beginning in June or later.

US monetary policy

MPC members were not the only ones pushing back on interest rate expectations last week. At the January Federal Open Markets Committee (FOMC) meeting, members voted for no change to the policy rate, as was expected, and adjusted language in a dovish direction, removing the reference to “any additional” firming with respect to inflation. However, the statement retained the assertion that the Committee would not cut rates “until it has gained greater confidence” that inflation is sustainably heading back to target.

Chair Powell reiterated this point at the subsequent press conference. He also emphasised that, given current data, a March rate cut was not likely.

The validity of this point was emphasised on Friday, when labour market data came in stronger than expected.

While unemployment was unchanged at 3.7% in January, there was a strengthening in both payroll data and wage growth: headline payroll numbers increased to 353,000 workers from 333,000, driven by an acceleration in private payrolls. Wage growth also advanced, rising to 0.6% month-on-month, from 0.4%, and to 4.5% year-on-year from 4.1%.

While the multi-month trend for labour data still suggests a cooling of conditions, the January report was a reminder that the labour market is still strong. Overall, this reiterates the case for a delay in interest rate cuts.


As has been well documented, a small group of companies had a huge influence on index-level returns last year – can this last? Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, known as the “Magnificent Seven”, have enjoyed stellar performance in the last 12 months, rising five times as much as the broad world index.

This partly reflects a period of recovery – these stocks were hit hard when monetary policy began tightening in 2021, loosing c. 50% from late 2021 to the end of 2022. However, the group have since more than made up the lost ground, collectively rallying over 130% since the start of 2023.

Given such strong performance, the obvious question is whether it can be sustained? Earnings might suggest that the answer is “yes”. With most of the Magnificent Seven stocks having recently reported earnings, earnings growth has been stronger than expected and stronger than the rest of the market. Excluding these firms, the US market has seen a 6% decline in net income, as opposed to the 3% increase for the whole market.

Another key driver is the AI story – investor enthusiasm for this investment theme mounted last year, especially in relation to firms making the “picks and shovels” required for the mass adoption of the technology.

The most pressing challenge could be monetary policy. While rate cuts are expected this year, there is scope for disappointment and a repricing of interest rate expectations could put pressure on valuations.


Important information
The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.


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