24 Jan 2024 | 5 minutes to read
Much ink has been spilt in recent months on the question of the timing of rate cuts in the US. Fed Chair Powell’s acknowledgement at the December Federal Open Market Committee (FOMC) meeting that the timing of rate cuts is the “next question” has given the market confidence that cuts are imminent. The market has also taken this as a sign that cuts are on the way elsewhere also, including the UK, with rate cut probabilities moving in a coordinated fashion over the Christmas break.
A key difference between the FOMC and the Bank of England’s Monetary Policy Committee (MPC) is that the MPC’s current stance is a hawkish hold. At the last few meetings, three members voted in favour of a further rate hike. Of the six members voting in favour of leaving rates unchanged, only one was concerned about the risk of overtightening. All in all, this means that the Committee has some way to travel to deliver cuts by June, as the market expects.
What is the roadmap to a policy shift from the MPC? Arguably, we are already on it. The trend in inflation data has been lower, with realized Consumer Price Index (CPI) and core CPI coming in below the Bank’s own estimates. December’s CPI print did accelerate to 4% yoy from 3.9% in November, but core remained at 5.1%. Moreover, strength in airfares and a tobacco duty rise explained a significant share of the rise in CPI, while core, sticky components, such as housing, water and fuel, cooled. CPI is expected to continue to cool in coming months, aided by well-behaved fuel prices and a 14% fall in the Ofgem price cap in April.
Labour data is also moving in the right direction. Frustratingly, the Office for National Statistics has not published official unemployment statistics in recent months, but “experimental” statistics suggest that unemployment has risen to 4.2%. Moreover, vacancies fell 2%, and payroll employees were down -0.1%. Wage growth is also slowing – while economy regular pay slowed to 6.6% from 7.2%.
Given the data is moving in the right direction, what now? The February Monetary Policy Report provides the first opportunity for the MPC to adjust guidance, with the publication of a new set of forecasts. However, we don’t expect cuts to happen until after the May Report, when MPC members will have greater confirmation from the data.
Chinese growth remains a concern for investors. Official China GDP statistics were released last week, confirming that growth slowed to 1% quarter on quarter from 1.5% in Q3, though a weak outturn at the end of 2022 means that year-on-year growth accelerated to 5.2% from 4.9%. Weakness in consumer confidence and the property sector remain key concerns, with soft real estate values likely feeding into consumer worries. After an initial bounce, broad consumer demand softened by the summer of 2023, though appetite for experiences, such as overseas travel, remained strong. However, toward the end of the year this also began to tail off, as demonstrated by slowing growth in air passenger numbers. With regards to real estate, residential property sales were down 6% year to date in December, a worry, given that real estate drives around a quarter of China’s economy. China also now faces the threat of deflation, with CPI in negative territory since October, though this at least means inflation is no constraint on monetary easing.
Has China’s leadership done enough and can investors hope for more policy support in 2024? Beijing has pledged to support growth and has announced an assortment of policies to ease pressure on the real estate sector and the economy more broadly, but the quantum of support has been underwhelming in comparison to the policy response that followed previous economic slumps. Fundamentally, Beijing likely cannot satisfy investors’ expectations of policy support and adhere to its reform objectives, especially regarding de-risking the property sector and local government finances.
With growth still soft, more support is expected, funded by increased government borrowing. A further RMB1trn of special bond issuance has been rumoured, on top of a mid-year RMB1trn increase to the government budget announced in October.
As the US election looms, attention is turning to Republican primaries. Ron De Santis’ withdrawal from the leadership race increases the likelihood of Donald Trump winning the Republican nomination and, based on current polls, the presidency.
What would a second Trump term mean for investors? So far, Trump’s campaign has been light on policy but a 10% tariff on all imports has been mooted, as well as further bank and energy deregulation. A 10% tariff is likely to attract retaliatory tariffs, while deregulation is broadly seen as good news for US bank stocks, as it should boost profitability, but bad news for energy firms as US energy output should increase.
Trump does face a potential roadblock to the presidency, namely being on trial for federal felony. While imprisonment would not preclude Trump from becoming President, the cases may colour public opinion.
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