Ear to the Ground

22 September 2023

Taking centre stage were again the central banks, in particular the Bank of England and the US Federal Reserve.  Following a weaker than anticipated inflation print the market was evenly split as to whether the Bank of England would raise or not.  Despite this, when they took the decision to place on hold this time round, there was an immediate market reaction, with the FTSE 100 eradicating its morning losses.  We also saw the swap curve quickly remove the potential for another rate rise.  Whereas one week ago the market had been expecting a move up to 5.5%, this is no longer the case.

The vote was a very close call, however, with 5 voting in favour of no change, whilst 4 voted in favour of a hike.  The 4 voting in favour of a rate hike had favoured a 0.25% hike.  This represented the first pause in almost 2 years, as the rate setting committee voted in favour of a ‘wait and see’ approach.  With inflation data for August being lower than consensus forecast, at 6.7% year on year compared to an expected 7%, it looks like Bank believe that previous rate hikes are starting to take effect.  Core inflation meanwhile came in at 6.2% versus an expected 6.8%.  The central bank also stated that Consumer Prices Index inflation is expected to decline significantly in the near term, due to energy inflation, despite the recent rise in oil prices, along with further falls in food and core goods price inflation.

Supporting the decision to hold was the release of Purchasing Managers Index data, where reading below 50 meant that the services and manufacturing remains in contraction.  Whilst the manufacturing number was slightly better than forecast, the service sector reading was weaker, with the consumer perhaps now feeling less frivolous.  I guess the key question now is, have UK interest rates peaked.  For now, that would appear to be the opinion of Goldman Sachs.

In the US we saw the Federal Reserve also maintain the status quo, with the Fed Funds Rate held at 5.25%-5.50%.  The central bank continued to reiterate, however, that they remain committed to returning inflation to the target level and would not rule out another rate rise should it be deemed necessary.  The latest dot-plot suggests that there still remains the possibility of one more 0.25% rate hike this year.  Looking into 2024 however we see a wide dispersion in committee member expectations.  One member believes that the rate could be north of 6% next year, whilst others believe that it could be in the 4.25% level.  This clearly shows how data dependant we remain in terms of trying to gauge the future direction of rates.

In terms of economic growth projections, we saw a pick up in the forecast for GDP in the US compared to the June forecast, at 2.1% and 1.0% respectively.  We also saw an upgrade to the 2024 projection, but at 1.5% compared to 2.1% for this year we can see how the rate of interest rates is going to bite into the economy.  Also of interest is their view on inflation, where they see Personal Consumption Expenditures (PCE) and core PCE inflation this year at 3.3% and 3.7% respectively.  Not only that, but they forecast 2.5% and 2.6% respectively for 2024, heading back towards the 2% target level.  Could it be that the Federal Reserve might have just about got it right in terms of their actions?  Time will tell, after all, we have seen how violently forecasts can change over time.