September Market News
Global investors were taken on somewhat of a rollercoaster ride over September. At the start of the month, uncertainty surrounding the health of the US economy sparked an initial sell-off. The Federal Reserve (Fed) stepped in to set the record straight at its mid-September meeting, with a decisive 0.5% interest rate cut which came as a surprise to many. The most surprising event came in the last week of September, as a barrage of economic stimulus by Chinese authorities acted as a shot of adrenaline for its troubled property and equity markets. The latter market felt an immediate boost, with many companies’ valuations rallying c.25% within days. The former will require a longer-term cure for its woes.
Bank of England holds interest rates and investors focus on economic growth
- At its September meeting, the Bank of England’s Monetary Policy Committee voted 8-1 in favour of holding interest rates at 5%, resisting the temptation to cut rates for the second meeting running. Governor Andrew Bailey said inflation pressures were easing, and the economy was evolving “broadly as we expected.”
- The Office for National Statistics (ONS) updated its economic growth figures in September. Gross domestic product (GDP) in Q2 2024 was still above trend but was revised down from 0.6% to 0.5%. There was little change to headline GDP across the remainder of 2023 and 2024.
- The updated GDP data changed the story slightly around the UK’s recent economic performance, but doesn’t have large implications for the near-term outlook. However, it means the post-pandemic recovery was a little stronger than previously thought.
- UK headline inflation, as measured by the Consumer Prices Index (CPI), remained unchanged at 2.2% in the year to August 2024, according to the ONS. Core CPI, which excludes energy, food, alcohol and tobacco, increased 3.6% in the year August 2024, up from 3.3% in July. Economists had expected a smaller rise in core inflation to 3.5%.
Concerns over the US labour market sparked market volatility, but inflation risk fades away
- Fears of a US recession crept back into markets at the start of September, fuelled by a disappointing US employment report that sparked an equity sell-off. Non-farm payrolls increased by just 142k in August, while payrolls for June and July were slashed. More positively, the US unemployment rate dipped to 4.2%.
- The personal consumption expenditures price (PCE) index, the Fed’s preferred inflation measure – declined to 2.2% over the year to August, from 2.5% in July, according to the US Commerce Department. Economists had expected an annual rate of 2.3%, further bolstering expectations of interest rate cuts over the coming months.
- However, the core measure, which excludes volatile items food and energy, ticked up to 2.7% over the same period. Fed officials tend to focus on the core measure as a better gauge of long-run trends.
- Core inflation didn’t stop the Fed from announcing a 0.5% rate cut to a range of 4.75% to 5%. The Fed’s Open Market Committee said it had “gained greater confidence that inflation is moving sustainably toward the 2% target.”
A shot of adrenaline for the Chinese market, but a cure is needed to ease longer-term concerns
- Chinese equities had their strongest run in years in the last week of September, boosted by various stimulus measures announced at the start of the same week by the Beijing government. The Chinese Politburo, headed by Xi Jinping, held an unscheduled meeting a few days later and made an announcement that effectively amplified the monetary policy stimulus.
- The stimulus measures from the People’s Bank of China (PBOC) included cutting its reserve requirement ratio by 50 basis points for most banks, the second cut in banks’ required reserves this year, and reducing its seven-day reverse repo rate – a key short-term policy rate – by 0.2% to 1.5%.
- To compound this news and further drive the market rally, China’s top leaders vowed to take action to stabilise the country’s property market and make real estate prices “stop declining”, according to state media. This has been a key factor behind negative foreign investment flows in recent years and appears to be a step in the right direction for economic recovery.
In summary
Equities were a mixed bag in September. Chinese stocks easily topped the performance tables after the raft of economic stimulus measures were announced. The US recovered its early losses in the month after the 0.5% interest rate cut from the Fed became a catalyst for equity markets – with many indices reaching record highs, once again. However, falling US interest rates can weaken its currency and counteract gains for sterling investors, a factor that could become more evident if the Fed continues to make aggressive rate cuts. UK stocks felt pressure as the upcoming Autumn Budget injected economic uncertainty and depleted investor sentiment. The lingering scars from the 2022 Autumn ‘mini budget’, which sparked a panic in bond markets, clearly remain on show.
US bond markets reacted positively to the Fed rate cut, with the yield on 10-year US government bonds (Treasuries) falling from 3.9% at the start of September to 3.78% at the end of the month. The yield on 10-year UK government bonds (Gilts) remained level over the period. With inflation already close to the Bank of England’s 2% target, Gilts are now offering an attractive real yield. Importantly, investors have seen risk factors change in recent months, as inflation risk has subsided, and recession fears have become more prominent. In this environment, an allocation to various bond types can prove an attractive hedge in a diversified investment portfolio – as well as generating a strong yield.
Infrastructure and real estate also had a strong month. As inflationary pressures ease and central banks continue their downward interest rate trajectory, both are becoming more attractive. Infrastructure and real estate assets have been underweighted, or completely avoided, by some investors since the fallout of the pandemic, as investors have reappraised the role that property assets may play in the future. However, recent strong returns have led many to rediscover this asset class.