Quilter Cheviot|Weekly Comment

Fed drives stocks and bonds higher

Our weekly market overview from Quilter Cheviot

By Richard Carter, Head of Fixed Interest Research

The recent rally in global stock markets was extended last week as the US Federal Reserve (Fed) struck dovish tones following its final monetary policy meeting of the year. The MSCI All Country World Index jumped 2.6% to take year-to-date gains to 21%, in US dollars, while fixed income markets also rose on the growing belief of interest rate reductions in 2024.

Three central bank announcements in the space of two days from both sides of the Atlantic were always likely to be the main market movers last week, and it was the Fed’s rhetoric that had the greatest impact, adding more fuel to the recent rally. US rate setters kept the benchmark rate unchanged at a 22-year high of 5.25%-5.50% but the “dot plot” showed their median expectations for future rates forecast 75 basis points of cuts next year – a greater reduction than the 50 basis points shown last time out.

The day before the Fed update, the latest US consumer price index (CPI) reading came in at 3.1% annually, broadly in line with estimates. The core reading, which excludes food and energy, remained at 4.0% year-on-year. Overall, the data contained no great surprises and is broadly supportive of price pressures easing and offered little by the way of prohibitive signs to future interest rate reductions.

US stock benchmarks surged 2.5% to chalk up a seventh consecutive week of gains – the longest streak since 2017 – and take 2023 returns to 24.9%. Technology benchmarks hit a one-year high following a slight outperformance on the week but the biggest gainers were small-cap stocks, jumping 5.6% to move out of bear market territory.

BoE and ECB more coy

The Bank of England (BoE) kept its benchmark interest rate unchanged for the third consecutive meeting but unlike their US peers, UK rate setters talked up a willingness to increase rates again if they believe inflation is proving more persistent. The divergent remarks from the central banks contributed to an underperformance for UK stocks, rising 0.3% on the week to take 2023 gains to 5.4%, as the British pound strengthened to 1.27 against the US dollar – the highest level in almost four months.

UK economic growth continues to lack any real momentum with a 0.3% drop in October following a 0.2% rise in September. The three-month period is flat. UK government bond yields tumbled amidst the global bond market rally, with the 10-year gilt yield dropping 36 basis points on the week to 3.68%. This benchmark is now back to pretty much flat for 2023.

The European Central Bank (ECB) also kept its key deposit rate unchanged while providing some pushback against imminent rate cuts, although the market largely looked through the messaging. The MSCI Europe ex UK index rose 1.1%, but German and French bourses underperformed.

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