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Sheldon Macdonald and Nathan Sweeney talk about the topics driving the markets in their weekly Monday update.
Monday Espresso Podcast - 25th March 2024
[00:00:00] Nathan Sweeney: It is Monday, the 25th of March. Today, I'm joined by Raj Manon.
[00:00:04] Raj Manon: Good morning, Nathan.
[00:00:05] Nathan Sweeney: Before we speak with Raj, firstly, let's recap on what was driving markets last week. As always, there was quite a lot happening, so there's a lot to unpack, so let's dive straight in.
[00:00:15] Nathan Sweeney: So for equity markets, it was really a strong week last week, a lot of that was driven by central bank meetings. We'll come on to that in a second. Now, if we look at UK equities, they were up close to 3%, as were US equities up close to 3%.
[00:00:30] Nathan Sweeney: Standout performer for me was Japanese equities. They were up over 5% for the week and actually, if we look at fixed income, it did pretty well across the board too. So all in all, quite a good week. So Raj, what was driving equity markets last week?
[00:00:44] Raj Manon: So in Japan, central banks there exited negative interest rates with its first hike for 17 years and with this, they also abandoned yield curve control.
[00:00:55] Nathan Sweeney: Okay. Yield curve control. What is that?
[00:00:57] Raj Manon: So that's a policy they introduced in 2016 and this is where the central bank intervened in the market with bond purchases and this was to ensure that the yield on 10 year government bonds did not exceed 1%.
[00:01:09] Nathan Sweeney: Okay. So they're keeping their borrowing costs down there?
[00:01:12] Raj Manon: That's right. So we saw this first hike, but you mentioned the market was very positive over the week and it's important to note that despite the hike, they still have the lowest policy rates in the world in Japan and the expectation is that this will be a one and done interest rate hike, rather than it being a start of a new hiking cycle.
[00:01:32] Nathan Sweeney: Okay, so interest rates just being slightly positive in Japan but we do have high interest rates in the UK and in the US, and we had central bank meetings there. So what were they telling us last week?
[00:01:43] Raj Manon: So in the UK, as expected, the Bank of England kept rates at 5.25%, but there was a definite shift in the member consensus in the voting, as this was the first time since 2021 that there were no votes to increase interest rates.
[00:01:59] Nathan Sweeney: Okay, that's quite encouraging. So it looks like we must be getting closer to those interest rate cuts.
[00:02:05] Raj Manon: And that certainly was the message being delivered by Andrew Baillie, the Bank of England Governor, commenting that interest rate cuts are in play and that inflation did not need to drop to the 2% target for cuts to begin.
[00:02:17] Raj Manon: So with Baillie's comments, and also last week we saw inflation coming in lower than expected at 3.4%, the market started to increase its bets on seeing rate cuts sooner than previously expected.
[00:02:29] Nathan Sweeney: Okay, that's quite good news for markets.
[00:02:31] Nathan Sweeney: Now, if we look at the US, are they following a similar trend?
[00:02:35] Raj Manon: They were in that we saw no change to interest rates and that was as expected and interestingly, last week, there was significant focus on the dot plots.
[00:02:44] Nathan Sweeney: Okay, so the dot plot, what exactly is that?
[00:02:46] Raj Manon: So that represents the forecast for each of the Fed officials on the path for future interest rates. So there were no big surprises for the market as the dot plots forecast three rate cuts for 2024 with a likely start in June.
[00:03:00] Nathan Sweeney: Okay, so that's interesting. So who do you think will be first to cut interest rates of those major central banks?
[00:03:06] Raj Manon: So we've actually already seen our first major central bank cut interest rates and that is the Swiss National Bank. So last week the SNB cut interest rates and they relative to other central banks could be more confident in their move because they've had inflation below the 2% target for nine consecutive months.
[00:03:26] Nathan Sweeney: Okay, thank you for that.
[00:03:27] Nathan Sweeney: So I think this really highlights the importance in markets of central bank action. So you can see the meetings we had last week lots of talk there about interest rate cuts coming pretty soon for markets and then you can see equity markets really responding to that, which is why we had those strong returns and then also bond markets also responding to that.
[00:03:48] Nathan Sweeney: So that's really positive news. One piece of information we did have last week, Raj, was UK inflation data. So do you think that inflation data is allowing those central banks to cut rates? Or how's that looking?
[00:03:59] Raj Manon: In the UK, the view is that the trend continues to be lower, and some of the forward looking data certainly suggests that.
[00:04:06] Raj Manon: And then in the US, it's a slightly more mixed picture. So growth has been stronger than expected in the US and the Fed did acknowledge that in the meeting that strength has led to the Fed modestly raising their forecast for growth and inflation and this view actually did show up in the voting as half of the Fed officials preferred to see fewer than three rate cuts this year.
[00:04:27] Nathan Sweeney: Okay, thank you, Raj, really insightful stuff there. So that was a really good synopsis of what happened in markets last week. Now, if we look ahead to this week, it's actually quite a relatively quiet week in terms of economic data releases. In the US, we do have a form of inflation data, it's called the PCE price index that comes out towards the end of the week.
[00:04:48] Nathan Sweeney: We do have an estimate for Q4 GDP growth in the UK coming out this week. The majority of stock markets will be closed on Friday and some on Monday because of the Easter bank holiday weekend. Thank you all for listening and have a great week.