MORE GOOD NEWS ON INFLATION KEEPS MARKETS IN A POSITIVE MOOD

MORE GOOD NEWS ON INFLATION KEEPS MARKETS IN A POSITIVE MOOD

This week saw government bonds lead a broad market rally once more. Better news for inflation and a gradual slowdown in economic activity raised hopes that the Federal Reserve may be able to engineer a soft landing, and bond markets are now hoping for rate cuts in the first half of next year. This caps a good month for markets and fixed income and global equities made significant gains. The positivity even extended to out of favour markets like UK equities and emerging markets shrugged off ongoing problems in China to record a post a strong gain. The outlier is commodities as a modest rise in gold has been offset by a significant drop in oil and gas prices.

The rally is welcome, particularly after recent challenging conditions for fixed income assets, but central banks remain cautious about declaring victory over inflation too soon. Another reason to avoid getting carried away is the time lag between rate hikes and their eventual effect on the economy. This usually takes 12 months to two years, so there is still a long way to go before the full impact of the recent hikes is apparent.

US: BONDS AND EQUITIES RISE AS ECONOMY SHOWS SIGNS OF SLOWING

The strong rally in US government bonds was extended as weak economic data reinforced the view that US interest rates have peaked. A number of measures show US manufacturing activity slowing and comments from several members of the US Federal Reserve were surprisingly dovish. US Treasury bonds gained, pushing yields down, as some investors look towards rate cuts in 2024. US GDP growth in Q3 was unexpectedly revised upwards, but this did little to dampen the positive mood. European government bonds also gained as inflation fell faster than expected. CPI in November fell to 2.4%, raising the possibility that the European Central Bank has also stopped hiking rates.

Global developed equities continued their recent strong run and most markets recorded big gains in November. UK gilt yields also fell this week but UK equities lagged other developed markets as comparatively high inflation means the potential for further hikes hasn’t disappeared. This helped sterling extend recent gains against the dollar and euro.

RETAIL:US CONSUMERS SPLASH OUT DURING KEY BLACK FRIDAY WEEKEND

US retailers celebrated record sales for the Black Friday weekend as sales for the post-Thanksgiving weekend topped $38bn. Online sales were particularly strong and increased around 8% compared with last year. Despite higher spending and a slight improvement in consumer confidence, retailers are cautious about the outlook. Many reported offering larger discounts this year and some are concerned that shoppers have used Black Friday sales to do their Christmas shopping early as memory of shortages in recent years and the cost of living increase makes shoppers more price conscious.

Consumer confidence has also ticked up in the UK and Europe, however, this is well-below pre-pandemic levels. Shoppers in the UK and Europe were much more restrained than in the US. Data from Barclaycard shows UK retail spending declined 0.6% compared with last year. Retail stocks have kept track with the wider UK and US equity markets this year, but they have not recovered the underperformance from Covid-era lockdowns.

CHINA: SURPRISE DROP IN MANUFACTURING OUTPUT DRAGS ON STOCKS

An unexpected decline in manufacturing shows the Chinese economy continues to struggle despite the government’s recent attempts to stimulate activity. The official purchasing managers’ index showed manufacturing output fell to 49.4 in November. Any reading below 50 indicates contraction. Activity in the services sector is still rising but it is growing at the slowest rate in almost a year. Meanwhile foreign investment into China turned negative for this first time as overseas investors appear to be nervous of Chinese government intervention and the stuttering domestic economy.

The decline in manufacturing added to the negative sentiment towards Chinese equities. Chinese shares fell further this week to add to the steady decline since the start of the year. In contrast, Indian equities continue their recent strength. Economic growth in India increased by 7.6% in the third quarter, due to a big increase in manufacturing and construction. Indian equities have extended their recent gains to outperform the broad market in 2023.