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Saturday 6th January 2024
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| | Hi Friend,
Inflation CPI basis fell to 3.9% in November from 4.6% prior month. The
surprise drop in inflation, larger than expected, raised
expectations of interest rate cuts sooner than the Bank of England has
suggested. Markets began to anticipate the Bank will start to cut rates in
the first quarter of 2024, with rates falling to 4 per cent by the end
of the year.
The Bank has said rates must remain in restrictive
territory for an “extended period” to curb persistent inflationary
pressures. Chief Economist, Hugh Pill has suggested it could be August
before any rate cuts take place.
Sarah Breeden, the Bank’s newly
appointed deputy governor for financial stability, said the risks of
inflation remaining stubbornly high, were greater, than the chances of a
significant fall. Interest rates will have to stay higher for longer,
she said.
“The economy is moving in the right direction to return
inflation to the 2 per cent target, but our job isn’t done,” “Monetary
policy still needs to be restrictive for an extended period of time to
keep pushing down on inflation and to return it sustainably to target.”
Leading
bond trader Pimco, thinks UK bonds are a one way bet. The prospect of
more rate cuts will push yields lower and bond prices up, it is said.
Martin Beck, chief economic adviser to the EY Item Club, said today’s
inflation data could result in the MPC cutting rates as early as
February.
We remain slightly more cautious. The uptick in Euro Zone inflation to 2.9% in December from 2.4% prior month, is a sobering reminder just how obstinate inflation can be. The detailed minutes from the FOMC, suggest the Fed is not ready yet, to ease off on base rates.
In the U..K. the fall in headline
inflation is of course welcome. The headline rate is flattered by very low goods inflation.
In detail, inflation CPI basis eased to 3.9% in November from 4.6% in
October. CPI(g) goods inflation moved to 2.0% from 2.9% prior month.
CPI(s) Service Sector inflation moved to 6.3% from 6.6%. Core inflation
eased to 5.1% from 5.7%.
The Bank will remain cautious and quite
rightly so. Food price inflation remains high at 9.2%. Earnings remain
high at 7.2%. Service sector inflation remains high at 6.0%. Core
inflation remains high at 5.1%. As Governor Bailey has suggested, “There
is still some way to go in Britain's inflation fight”.
Our
outlook remains unchanged. Inflation trends are on the right track.
Producer prices are in negative territory. Oil prices remain subdued.
Further progress must be seen in food, earnings, service sector prices
and core inflation before rate cuts will be tabled.
The
yield on the benchmark 10-year gilt, trades at 3.8 per cent this
morning up from 3.5 per cent two weeks ago. U.S. ten year bond yields trade a 4.1% from 3.9% last week. We expect a further rally in bond yields as rate cut expectations fade. For the moment it would appear the fall in yields is
slightly over played.
The Bank may just be able to offer a rate cut in the Spring. April or May remains a possibility. It will be a close run thing, closer than the election perhaps.
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| | We
track ten markets in our global equities model. The Dow, S&P and
NASDAQ in the U.S.A, the FTSE, CAC and Dax in Europe. In Asia, Nikkei,
Hang Seng, Shanghai and BSE feature. This is our review of 2023.
Global
equity markets experienced their strongest year since 2019, with the
MSCI World index, a broad gauge of global developed market equities,
surging by 22%. This performance was driven by a strong rally towards
the end of the year, as investors anticipated that major central banks
had finished raising interest rates and would implement significant rate
cuts in 2024.
In the United States, the NASDAQ led the way with a
43% increase, followed by the S&P 500 index with a 24% rise, and
the Dow Jones Industrial Average with a 14% gain. This growth was
largely driven by a shift in interest rate expectations, as recent data
showed inflation falling faster than expected in western economies. The
Federal Reserve signaled the possibility of substantial rate cuts in
2024, which further fueled this optimism.
European stocks also
performed well in 2023, with the German DAX and French CAC indices
rising by 20% and 16.5% respectively. However, the FTSE lagged behind,
closing just above the 7700 level, for a 4% gain in the year.
Asian
markets had a mixed performance. The Nikkei index in Japan surged by
28%, and the BSE index in India was up by 19%. However, concerns about
the investment outlook in China led to a 4% fall in the Shanghai index
and a 14% drop in the Hong Kong Hang Seng Index.
A handful of big
technology stocks, known as the "Magnificent Seven" (Apple, Microsoft,
Alphabet, Amazon, Tesla, Meta, and Nvidia), drove a large part of the
gains on Wall Street in the year.
Looking ahead to 2024, some
investors believe that markets may be pricing in too much optimism that
inflation will continue to trend lower without the US economy slipping
into recession. Expectations of significant rate cuts in the USA and UK
could be overblown, and the 40% gain in NASDAQ stocks may need a period
of repricing before further gains are possible.
Our premium to
value is 5%, with significant stress still evident in Hang Seng and
Shanghai. The contrarians would appear to benefit from a move into Hang
Seng and Shanghai as Europe and U.S. appear over priced. Nikkei
continues to look over played. We would look for a 5% correction in the
US and a mode modest adjustment in Europe.
This week, the markets opened the New Year with a 3% correction on NASDAQ. Our Empires of the Cloud fund was off by just over 3% with a big correction for Amazon and Apple down 4.4% and 6.0% respectively. It could be a roller coaster year.
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| | That's all for this week. Happy New Year. I hope you all had a great break and are set for an exciting year. On Monday we will be publishing our outlook for the year ahead. This is an election year after all. We plan to be more active in 2024. The objective to double the mailing list and to double the number of live presentations with a growing client list. Fast moving content rich and fun! As always ...
John
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