Week ending 20th October 2023.

As demonstrated by the accompanying table, this week presented notable challenges for markets driven by geopolitical tensions that served to both elevate and dampen investor sentiment. Fears arising from the escalation of geopolitical tensions in Gaza have intensified concerns about potential disruptions in oil supplies, adding to expectations that interest rates may need to stay elevated for an extended period.

It’s worth noting that our experienced investment management team is well-equipped to skilfully navigate this landscape. The team excel in identifying investment opportunities, ensuring portfolios are well-positioned as the global financial landscape navigates uncharted waters.

Chairman of the Federal Reserve Jerome Powell’s speech before the Economic Club of New York offered insights into the current economic climate. Powell’s remarks significantly influenced the financial landscape, propelling the 10-year U.S. Treasury yield to cross 5% for the first time since 2007. Powell emphasized key factors of importance to market participants, with inflation taking the spotlight. Although short-term core inflation measures have recently eased, it’s essential to recognize that inflation remains elevated. He noted that failing to act decisively could lead to persistent inflation entrenchment, requiring more drastic monetary policy. Labour market dynamics were another key aspect, with various indicators suggesting a gradual cooling while wage growth moves closer to the Federal Reserve’s 2% inflation target.

Powell acknowledged that reaching the 2% inflation goal might necessitate a period of below-trend growth and some labour market softening, highlighting the potential trade-offs between growth and inflation control. Powell’s speech underscored the complex challenges facing the US economy and the Federal Reserve’s determination to balance inflation control with economic growth sustainability. Market participants closely monitor these developments in light of rising geopolitical risks in the Middle East, with the focus on incoming data, the economic outlook, and prudent monetary policy management.

Additionally, initial jobless claims fell to 198,000 in the week ending October 14, marking a significant drop since January 2020 and coming in below market forecasts. This adds to the evidence of a tight labour market, reinforcing the Federal Reserve’s tightening and extending the period during which the central bank may be expected to maintain restrictive borrowing costs.

In the UK, data revealed an unexpected decline in retail sales for September 2023, with sales down by 0.9% on the month following an August increase of 0.4%. Contrary to consensus expectations of a 0.2% decline, annual sales also fell by 1% in September, following a 1.3% drop in the previous month. The unseasonably warm weather influenced the sale of cold-weather gear, although it boosted food sales, and fuel sales rebounded from the previous month’s decline.

The market also digested a concerning survey from Market Research Company GfK, indicating a notable decline in consumer confidence. The confidence index dropped by nine points to -30 in October, reversing a two-month trend of improvement. The decline in confidence, particularly in major purchases and expectations for personal finances, emphasized the enduring impact of the cost-of-living crisis on the economic outlook. These trends pose challenges for businesses and investors who closely monitor economic uncertainties and their implications for market performance.

Coming next week we have UK unemployment rate, interest rate decisions from the Bank of Canada and the European Central Bank. We also have US and Eurozone PMI data, US durable goods orders and Q3 GDP. On Friday, the Bureau of Economic Analysis will release the Personal Consumption Expenditures (PCE) Price Index for September, the Fed’s preferred inflation gauge. Tech giants Microsoft, Meta Platforms, Amazon, and Google-parent Alphabet report earnings next week.

Kate Mimnagh, Portfolio Economist