July – September 2023
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September marked the end of the third quarter of 2023, with the period being broadly negative for equity returns. The biggest beneficiary was the FTSE 100, which rose +1.02% from 7,532 to 7,608 – though the more mid-cap dominated FTSE 250 did fall -0.75% from 18,417 to 18,279. In the US, the strong start during the year’s first half was tempered slightly after the S&P 500 fell -3.65% from 4,450 to 4,288. Similarly, the S&P Euro Plus (which excludes the UK) fell -3.18% from 2,275.33 to 2,202.93. Conversely, it was the turn of bonds to enjoy superior returns last quarter – particularly those of relatively short maturity – as the Markit iBoxx GBP overall 3-5yr bond index returned +3.41%. Such an occurrence serves as a compelling demonstration of the advantages associated with maintaining a diversified portfolio of assets.
Despite the negative returns for the S&P 500 over the period, the economic environment is much more benign for the US in comparison to most of the rest of the world. Headline inflation has now significantly fallen back from a peak of 9.1% seen in June 2022, with the figure now at a much more manageable 3.7%. It should be noted that this is still above the US Federal Reserve’s target of 2%, though there is certainly more scope for the Fed to switch to a more dovish footing moving forward. In a similar vein, the UK finally saw some progress in its own fight against inflation. The June figures, released in July, were 0.3% below the expected rate at 7.9%. In July, the inflation rate met expectations at 6.8%, and in August, the rate was again 0.3% lower than predicted, standing at 6.7%. The most significant of these from a market perspective was the first – with the FTSE 250 rising +3.78% in one day off the back of the news. Unfortunately, this momentum was not able to be maintained, with the index peaking at this level for the period and instead moving a further -5.40% lower through to the end of September. Evidently, market participants require further, preferably consecutive, positive inflation prints to come through before optimism is able to return to the index.
The day after the UK’s September inflation print, the Bank of England chose to keep interest rates level at 5.25% – a figure which is still the highest since 2008. This marked the first pause in increases since the current cycle of monetary policy tightening began in December 2021, with the vote coming in at 5 votes to 4 – with the other members all opting for an additional 0.25% increase. This move by the Bank, combined with the Fed’s decision to keep their own rate at 5.5%, do raise hopes that we could now be at (or very close to) peak interest rates for this cycle. Both Andrew Bailey and Jerome Powell did leave the door open for further hikes, though the all-important path to interest rate reductions is now closer than it has been at any point in the last 2 years.
The annual Jackson Hole Symposium brought together central bankers, finance ministers, and scholars globally in late August. Under the “Structural Shifts in the Global Economy” theme, the event delved into topics such as the trade-related economic implications and the challenges and opportunities presented by digital transformation, notably highlighted by ECB President Christine Lagarde. All eyes were on Federal Reserve Chairman Jerome Powell, whose opening statement suggested a need for ongoing restrictive monetary policies without clearly indicating imminent rate changes. Powell’s metaphor, describing the Fed’s situation as “navigating by stars under cloudy skies,” emphasized the complexity of factors influencing monetary policy. The Symposium not only provided valuable insights into policymakers’ perspectives and approaches but also encouraged dialogue and cooperation. This collaborative spirit remains vital as the world grapples with the aftermath of recent unprecedented challenges, making the Symposium a significant platform for addressing global economic issues.
In September, there was some positive news for the UK after the ONS revealed that the economy experienced a stronger recovery at the end of 2021 than previously estimated. Instead of being 1.2% smaller as was originally reported, the data now shows that the economy was, in fact, 0.6% larger in the final quarter of 2021 compared to pre-pandemic levels. This was due to the decline in 2020 being less than first reported (-10.4% vs -11%), as well as the recovery in 2021 being greater (+8.7% as opposed to +7.6%). The result of this means that the UK was not, in fact, an outlier within the G7 and was broadly in line with most other European nations – albeit still one of the lowest ones – with Germany now being the worst hit. Whereas this revelation should hopefully serve to improve some of the short-term narrative around the UK, there is still much work for fiscal and monetary policymakers to do to quell the threat of inflation and restore the economy to consistent levels of growth.
