Market Update 11th September 2023

Dancing in the dark

There are surely no three words less likely to engage a reader’s attention than “the Federal Reserve”. The mere mention of the world’s premier central bank is enough to induce an oddly simultaneous shudder and yawn. But please bear with me. There was time, way back yonder, when they may as well have shut up shop for seven years. The current lust for the limelight is not necessarily here forever.

It feels a lifetime ago, but for virtually seven years between December 2008 and November 2015 American interest rates remained unchanged. What did we write about then? This was even before Donald Trump gave us an easy weekly topic. Hopefully the 2023 necessity to keep writing about the tedious central banks and their floundering attempts to control inflation will morph into something both more interesting and more productive. Until then, I fear we are stuck in the same rut, with each day starting with the ghastly “I got you babe”.

We may be near the turning point. Next week both the Federal Reserve and the Bank of England decide whether they should, or need to, raise interest rates yet again. The European Central Bank beats them to it and pronounces on European rates this Thursday. Will they? Won’t they? Well, maybe. Maybe not.

This is the problem. No one has any idea. We may all hope that they are done, but they have concocted this meaningless expression of being “data dependent”. I have no idea what this actually means. And neither, so far as I can tell, does anyone else. Which leaves the financial markets floundering around, second or third-guessing exactly which bit of random monthly economic data it might be that determines the decisions.

And herein lies the second problem. These decisions matter. The economic camels have had bales of hay heaped upon their backs. Markets are guessing that their spines can bear the strain for now, but without a great deal of confidence. Both equity and bond markets, however, have a degree of bias while they fidget about. Both are saying that whatever pain is inflicted by higher interest rates, and whatever pain is yet to come, will be mild and short-lived. A summer cold, as it were.

Our next Lloyd Grossman-esque clue comes on Wednesday, with the latest monthly update to US inflation rates. It is a statement of the exceedingly obvious that, in the short run, this has the potential to move equity and bond markets sharply. If only we knew which way. The current expectation is that the core rate of the Consumer Price Index will have fallen from an annual 4.7% to 4.3%. The headline rate, however, is predicted to have increased from 3.2% to 3.6%. If I am forced to come off the fence: unless Wednesday’s data is notably more benign than expected, the Fed is set to raise rates again next week.

I fear that the Bank of England will make the same mistake. The housing market, which is as good an indicator of the future direction of the overall economy as I know, is showing increasing signs of stress. The latest Halifax House Price Index shows average property values falling an annual 4.6%, the largest decline since 2009. The latest commentary from Rightmove, last month, stated (the) “Number of sales being agreed is now 15% lower than the more normal 2019”. In yet another statement of the very obvious, it is hardly surprising. The increases in mortgage rates have been crippling and will remain so as borrowers steadily migrate off maturing fixed term deals.

The next update to the UK’s inflation rate comes next Wednesday, the day before the MPC decides. The core rate is expected to be 6.7%, the headline rate to be unchanged at 6.8%. It will take courage for the MPC to not raise rates with inflation at that level. Let us hope that they are brave enough.

Jim Wood-Smith – Market Commentator and Head of Climate Transition

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