October – December 2023

Despite these impressive broad-based investment returns, it was a difficult start to the period in October after the Hamas invasion of Israel on 7th October resulted in the death of over 1,000 Israeli civilians and approximately 240 people taken hostage – and with the Israeli government declaring war the next day, the escalating number of casualties has been harrowing to observe. Despite the conflict being such a brutal and divisive one, its impact on investment markets has been notably limited, with the main reason for the October falls driven chiefly by US political upheaval following the removal of Speaker Kevin McCarthy by a faction of hard-right Republicans. This sparked volatility in the bond market, particularly in longer-term US bond yields, as investors extrapolated the ramifications of persistent fiscal upheaval. After three weeks where the House lacked a head, ultra-conservative Mike Johnson became the new Speaker on 25th October, calming markets and providing a platform for strong November and December in equity and fixed income markets.

Turning to inflation, a topic that has dominated the market agenda over the last two years, markets anticipate that 2024 will see inflation in a more normal range and, therefore, take more of a backseat. In recent months, each US print has been progressively lower, with November’s print (released in December) releasing at 3.1%. The eurozone also enjoyed an encouraging period for their releases, with the November print coming in at 2.4%, just above the 2% central bank target. UK CPI figures remain slightly more elevated than their Western counterparts. However, November’s release came in at 3.9%, much lower than the 4.4% expected. Market reaction was understandably positive, with the FTSE 250 rising +1.62% on the back of the news and 5-year interest rate swaps (used as the basis by mortgage providers to underwrite fixed-term mortgages) falling around 4% on the day.

This inflation print trend has given credence to the decision of the major Western central banks to pause their interest rate hiking, with the Bank of England, Fed, and ECB all keeping their rates level over the period (at 5.25%, 5.5%, and 4.5%, respectively). Rhetoric from key policymakers has also softened markedly, with the most dramatic shift in tone coming from Federal Reserve Chairman Jerome Powell, who announced on 13th December that they were poised to implement rate cuts in 2024. This indicates that the Fed now believe inflation to be broadly under control, with their main fear pivoting to the danger of rates being overly restrictive for too long. However, this view did stand in contrast to comments made the following day by Bank of England Chair Andrew Bailey that it was ‘too early’ to start thinking about cutting rates and that it was not possible to ‘definitively’ say that the peak in rates had been reached either.

To further highlight the disparity between the UK and the US, revised figures released in December showed that GDP for the UK actually contracted by -0.1% in the third quarter of 2023, after it was previously reported that growth was flat. As a recession is defined as two consecutive quarters of negative growth, market observers will be keeping a keen eye on coming GDP releases concerning the fourth quarter. It should be noted, however, that if the UK does slide into a recession, that will create further pressure for the Bank of England to reduce interest rates to stoke the economy – a move which historically has been shown to signal a period of positive performance for investment markets. Conversely, the US was revealed to have grown at an annualised 4.9% in the third quarter, which, combined with the improving inflation picture, has raised expectations that policymakers may just be able to pull off a ‘soft landing’ and achieve an appropriate amount of disinflation to return inflation to the 2% target, yet also being able to avoid a recession.