Global equities continued on their upward path last week, rising around 0.7% in both local currency and sterling terms. The US and UK both gained 1.2%, while emerging markets were flat and Europe and Japan were down a little.
UK bonds also had a good week, as gilts unwound their recent losses with a gain of 1.4%, while US Treasuries were little changed. Elsewhere, oil prices fell back 6% as fears eased that Israel would target Iranian oil facilities in retaliation for its recent missile strike. Gold, however, continued its stellar run, rising a further 2% and breaking above $2700/oz for the first time.
The rally in UK gilts was driven by the latest economic news. First off, the labour market data showed a further easing in wage pressures with underlying earnings growth slowing in August to 4.9% from 5.1%. Job vacancies also continued to decline and are back down to just above pre-pandemic levels, reinforcing the picture of a gradual cooling in the labour market.
This was then followed by news that inflation had dropped more than expected in September. The headline rate fell to 1.7% from 2.2%, dipping below the Bank’s 2% target for the first time since April 2021. Importantly, the core rate also declined to 3.2% from 3.6% and service sector inflation eased to 4.9%.
On the back of these numbers and BOE Governor Bailey’s recent comments that the Bank could become a bit more aggressive in cutting rates if inflation pressures were to wane, the market now sees rates being reduced as far as 3.75% by mid next year, with a cut of 0.25% on 7 November all but a done deal.
Meanwhile, the rumour mill surrounding the tax hikes to be included in the Budget on 30 October has been in overdrive. Hot favourites now include a rise in employer national insurance contributions, an increase in capital gains tax at least on stock sales, a clampdown of inheritance tax loopholes and an extension of the freeze on personal tax thresholds beyond 2028. These would come on top of existing plans to extend VAT to private school fees, increase taxes on ‘non-doms’ and extend the windfall tax on oil and gas companies.
All these measures, along with spending cuts, would be used to fill the black hole in the public finances which the Government now estimates to be as much as £40bn if it is to be able to fund its public spending plans. But for the UK equity market at least, the key will not be the precise mix of the forthcoming tax hikes but whether the Chancellor manages to pull off the delicate balancing act of putting the public finances back on a sounder footing while boosting both public investment and investor confidence in the economic outlook.
Elsewhere, the most recent numbers on Chinese activity proved a mixed bag. Growth was slightly weaker than forecast in the third quarter with GDP up 4.6% on a year earlier, below the government’s 5% target for the full year. However, retail sales and industrial production growth both perked up unexpectedly in September. Even so, the economy still requires a major fiscal stimulus, more details of which hopefully will be confirmed by the authorities over coming weeks, allowing Chinese equities to build on their recent bounce.
In the US, the economic news was confined to a larger than forecast gain in retail sales in September, which leaves the Fed all the more likely to cut rates only by 0.25% next month rather than by 0.5% as in September. In Europe, the ECB reduced rates as expected by a further 0.25% to 3.25%. Although the Bank was fairly non-commital over the potential for future cuts, the weakness in growth and easing in inflation mean it looks set over coming months to continue cutting rates by 0.25% at each meeting.
Lastly, conflicting earnings reports from two of the largest companies operating in the global semiconductor industry led to some sharp swings in sentiment but even so the technology sector overall ended the week broadly flat.
This coming week is light on data other than US, UK and EU business confidence numbers on Thursday. But with the third quarter earnings season rumbling on in the background and the US elections on 5 November drawing ever closer, there will still be more than enough for markets to contemplate.
Rupert Thompson – Chief Economist