Interest rates appear close to peaking
UK inflation unexpectedly fell to 6.7% in the 12 months to August, down from 6.8% in the previous month, driven by falling restaurant prices.
US inflation rose above expectations to 3.7% in August, due to higher petrol prices, although core inflation fell to 4.3%.
Bank of England surprised markets by keeping interest rates at 5.25%, ending a run of 14 consecutive hikes.
US Federal Reserve also kept rates unchanged but upgraded its growth forecast.
Crude oil prices exceed $90 a barrel for the first time in a year, as the impact of tighter supply and low US strategic oil reserves feed through to the market.
Global trade volumes fell 3.2% in the year to July. The contraction is the fastest pace since 2020, due to a slowdown in global demand
The US Federal Trade Commission accused Amazon of using “a set of interlocking anti-competitive and unfair strategies” to maintain monopoly power.
UK Prime Minister Rishi Sunak announced a delay to a range of climate regulations.
The UK economy contracted by a greater-than-expected 0.5% in July, as consumption and production were hit by the wet weather and strikes. However, GDP for Q2 2023 was revised higher.
Birmingham City Council, the largest local authority in Europe, declares itself bankrupt.
China bans the use of iPhones for government officials.
Rupert Murdoch announces his retirement as the chairman of Fox Corporation and News Corp.
Global equities broadly moved sideways during September, as the weak performance of bonds took centre stage for investors. Bond yields soared and prices fell during the month as investors worried that the key central banks will keep interest rates higher for longer than was previously expected. The yield on 10-year US Treasuries rose by 0.5% to cycle highs of 4.6% during the month.
Renewed strength in the price of oil is also fuelling concerns that inflation may not yet be defeated. WTI crude oil spiked above $90 for the first time since November 2022, as the impact of tighter supply and low US strategic oil reserves feed through to the market. Inflation did generally continue to fall around the world although US inflation did rise above expectations to 3.7% due to higher petrol prices. Core inflation, which strips out volatile energy and food prices, declined as we expected.
The European Central Bank raised interest rates to 4% during the month. This was followed by suggestions from the central bank that they had taken rates to a level that “if maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation at the two percent target”. Analysts took that to mean no more rate rises. The 4% ECB deposit rate has now eclipsed the previous high in 2001 when borrowing costs were increased to boost the value of the newly launched Euro.
The US Federal Reserve chose not to hike during its September meeting, but it upgraded its forecasts for growth and said that it was likely that there would be another rate rise this year. US Fed Chair Jerome Powell hammered home this point when despite confirming that they are almost where they need to be with regard to interest rates, due to a better economic outlook, he stated that any relief from higher borrowing costs will be neither swift nor generous.
The market was expecting the Bank of England to hike rates by a further 0.25%. The Monetary Policy Committee surprised markets and kept rates on hold, by five votes to four. This ends a run of 14 consecutive rate rises since December 2021.
Ultimately, the gamble is that short term pain from higher interest rates will eventually fade and economies can move forwards and the next question will be whether anything will actually meaningfully change or will this boom and bust cycle continue in perpetuity?
The short term versus long term effect of higher interest rates is interesting to analyse. The Barcelona School of Economics suggested earlier this year that higher interest rates were bad news for growth over the longer term, as they choked off green shoots of innovation by increasing the cost of capital and dampening demand. The Frankfurt School of Finance and Management found, one year after a 1% rise in interest rates, that venture capital investment falls by a quarter and patenting and innovation falls by 9%.
The US equity market and its large technology stocks have outperformed during the year, but there are signs that they might be running out of steam. With valuations looking quite stretched, we reduced exposure to US equities during the month. UK equities outperformed during the month, helped by their relatively high exposure to the energy sector and lack of technology stocks. We currently favour UK equities, for their defensive properties and attractive valuations, so increased exposure during the month.
As we move into the last quarter of the year, inflation will still be an important factor, but we think economic growth and the potential for a recession will now move markets. We will closely follow the economic leading indicators for signs of a slowdown and react accordingly.
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