Macro Backdrop
As it stands today one of the most anticipated recessions ever has yet to materialise. Economic growth, with the exceptions of Germany and Italy, has generally been positive, although outside the US the gains have been more modest. The Western world has undergone one of the fastest monetary tightening phases in history, as Central Banks grapple with inflation. Inflation in the UK fell to 6.7% in August, below a 7% forecast, and core inflation (ex-energy and food) dropped to 6.2%.
This allowed the Bank of England to hold interest rates in September. Inflation in the US picked up to 3.7% in the same month, driven largely by a higher oil price and year-on-year base effects. The US Fed also held interest rates in September. The Eurozone’s ECB pushed ahead with its interest rate rise but indicated this rise was likely the last, given the fragile economic outlook. China has been dealing with deflationary pressures and a struggling property market.
Interest rate rises generally have a lagged effect of around 12 months or more. Some analysts note that labour market trends can serve as an indicator for economic direction, while market anticipation points towards possible future interest rate movements.
Bond Markets
The inflation and interest rate dynamic has been most keenly felt in global fixed income markets. Inflation in the UK led to government bond yields continuing to rise, yet recent business surveys and inflation figures have influenced investor sentiment. In the US, GDP growth has led to increased scrutiny of interest rate policies. Corporate debt markets have also seen activity.
Stock Markets
Global stock markets experienced some volatility in the third quarter. Markets continue to grapple with inflation, interest rates, and economic growth. Despite the fluctuations, most markets are in positive territory this year, with Japan showing a strong performance. The US market has been performing well, particularly the technology sector, while medium and smaller companies in the UK have lagged behind. The UK market remains less favoured on the international stage for various reasons, possibly including political factors.
Companies like Domino’s Pizza and Trainline have shown strong performances, as noted by various market analysts. Recent Mansion House Reforms could influence capital allocation in unlisted UK equities, potentially having a significant impact on markets like the AIM.
Equities have been cited by some as a potentially strong asset class for outperforming inflation over the long term, subject to market conditions.
All data has been sourced from FE fundinfo, Refinitiv and Square Mile.
