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Sheldon Macdonald and Nathan Sweeney talk about the topics driving the markets in their weekly Monday update.
Monday Espresso Podcast - 23 December 2024
[00:00:00] Nathan Sweeney: It is Monday, the 23rd of December, thanks for joining us for our final podcast of 2024. And we look forward to seeing you all in 2025. So the first podcast of next year will be a review of 2024 and a bit of an outlook for 2025. So I'm Nathan Sweeney, CIO of Multi-asset at Marlborough. I'll be running through some of the main news for the week with Sarah Todino, assistant portfolio manager of the team.
Good morning, Sarah.
[00:00:29] Sarah Todino: Good morning, Nathan.
[00:00:30] Nathan Sweeney: So Sarah, let's start with how markets performed last week.
[00:00:35] Sarah Todino: Okay. Well, equities and bonds were broadly negative as it's been a big week for interest rate decisions impacting markets. And that we'll go into a little more detail.
[00:00:45] Nathan Sweeney: Okay. So let's start with the US then. What was happening on that side of the water?
[00:00:49] Sarah Todino: So, an interest rate cut in the US was widely anticipated. Markets were pricing in a 97% chance of an interest rate cut. And that's what we saw. So the Federal Reserve lowered interest rates by 25 basis points to a target range of 4.25% to 4.5%. So that's the third interest rate cut of the year.
[00:01:10] Nathan Sweeney: Yeah, so following those meetings, you normally get a press conference where the chair of the Fed speaks. So was there any messaging as a result of that cut or anything we need to take away from the messages following that meeting?
[00:01:22] Sarah Todino: Yeah, so Fed Chief Jay Powell indicated that policymakers would be more cautious as they considered more easing.
So they're now signaling two interest rate cuts next year compared to the previously mentioned four interest rate cuts.
[00:01:36] Nathan Sweeney: Okay, and I expect markets didn't like that because ultimately markets expecting those rate cuts and would have had to recalibrate some of their expectations. So how did markets react to that news?
[00:01:46] Sarah Todino: Yes, US stocks fell as the Fed had signaled a slower pace of easing next year. So the S&P 500 was down nearly 3% on Wednesday. US Treasury yields also surged higher and the US dollar rose as well.
[00:02:00] Nathan Sweeney: Yeah, so I suppose my key takeaway from that is that, ultimately, markets have taken good news as bad news.
So what do I mean by that? So if the Fed is saying that actually we don't need to cut rates as much, ultimately they're saying, actually, look, the economy is stronger than expected. So therefore we don't need to cut interest rates as quickly. And if the economy is stronger than expected, that's good for companies.
But you often get these knee jerk reactions in markets as they try to recalibrate what that means. But ultimately they'll come around to the conclusion that, look, actually the economy is strong and that should be good for corporate earnings. But you know, this is the type of reaction you would expect when you get that change of language coming from central banks.
So we also had another central bank meeting during the week, the Bank of England. So what happened on that side?
[00:02:50] Sarah Todino: Yes, the Bank of England kept rates on hold at 4.75% and that was in line with forecasts as earlier in the week we saw inflation increase for the second month in a row. So UK inflation came in at 2.6% and alongside wages growing at a faster rate, this was enough for the Bank of England to keep rates on hold. So the FTSE 100 closed 1.1% lower on Thursday following that news.
[00:03:15] Nathan Sweeney: Yeah, so I think there's an important distinction to make here. We've got The Fed on one side and the bank of England on the other.
And, you know, our expectation moving into next year is that we get the Fed moving at a slower pace because the economy is stronger, whereas we get the bank of England moving at a faster pace because the UK economy isn't as strong. So even though the bank of England didn't cut in December, they did in November.
So you have to remember, we've had a number of rate cuts already, and we expect to see more in 2025, but we expect to see less cuts in the U S because their growth is stronger. Now there was another central bank meeting. So it was a week of central bank meetings. So the last one was the bank of Japan.
So what happened there?
[00:04:02] Sarah Todino: The bank of Japan kept interest rates on hold. And again, that was as expected. So that's maintaining the short term interest rate at 0.25%. So here we had the bank of Japan confirming they needed more time to assess uncertainty and risk. So they're expecting CPI inflation to increase gradually and November's reading saw inflation climb from 2.3% last month to 2.9%. And that was largely due to inflation. Food prices and gas and electricity prices.
[00:04:33] Nathan Sweeney: So let's take a look at the week ahead. What's on the table for next week?
[00:04:38] Sarah Todino: Well, of course, it is the Christmas holidays, so it is a light week for data. But we will see some GDP growth data in the UK and an update on the Japanese unemployment rate.
[00:04:49] Nathan Sweeney: Yeah, so hopefully for our listeners, they'll have turkey on the table for next week. But yeah, so I would like to take this opportunity to thank all of our listeners who've listened in throughout the year. Obviously it's been quite an eventful year. We've had strong performance from markets. We do expect obviously some volatility along the way, and we are witnessing that this week, and that's just as a result of change in expectations from central banks and probably some people taking a little bit of profit as well as we move into the next year.
But as I mentioned, we will see you all in the new year. There'll be no podcast next week, but, we'll be back on the 6th of Jan and we'll give a recap of markets for 2024 and what to expect in 2025. So thank you again and have a great festive season.