Quilter Cheviot|Weekly Comment

Stocks hold on to gains ahead of key central bank meetings

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

A late rally on Friday helped most major stock benchmarks end last week out of negative territory, while a fall in UK government bond yields saw the 10-year gilt yield dip below the 4% level for the first time since mid-May. This week all eyes will be on a trio of central bank decisions, with the Bank of England, Federal Reserve and European Central Bank all set to deliver their final monetary policy updates of the year.

The main event last week was the November US jobs report which showed 199k jobs added against a consensus forecast of 180k and the unemployment rate drop to 3.7%. After 150k jobs were added in the previous month and the unemployment rate increased to 3.9%, the latest data looks at face value to suggest a retightening of labour market conditions and a pushback against the idea of rate cuts in the first quarter of 2024. However, upon closer inspection it is apparent that the headline jobs figure was boosted by 32k due to the return of workers from the United Auto Workers union after a six-week strike was ended. 

Overall, it appears the US labour market is cooling, a view supported by the latest job openings figures which showed a far bigger than forecast drop to 8.73m – the lowest level since March 2021. Even though the US jobs report attracts a great deal of attention it is only one piece of the puzzle and when the mitigating factor of returning workers is taken into account, the big picture is still one of a labour market that is acting just as the central bank would like.

US benchmarks eked out a 0.2% gain on the week to take year to date returns to 21.8%, in local currency. Interestingly, small caps outperformed large caps for the third time in the past four weeks while growth stocks delivered better return than value. Both these dynamics are suggestive of more favourable economic conditions.

The MSCI Europe ex UK index posted a solid weekly return of 1.6%, taking 2023 returns to 16.0%, in local currency. German and French stocks outperformed as further comments from European Central Bank policymakers pointed to reductions in interest rates in the first half of 2024. Government bond yields declined with the German 10-year yield falling to its lowest levels of the year and ending at 2.28%. In contrast, US government bond yields edged higher on the week as the 10-year Treasury yield closed at 4.23%, increasing the spread between the two regions to nearly 200 basis points.

Back to 4%

The UK saw a 10 basis point decline in its 10-year gilt yield last week, ending at 4.04% after briefly trading below the big figure. The benchmark remains higher by 37 basis points on the year, slightly more than the 35 basis point increase in the US equivalent while the German equivalent has fallen 29 basis points.

UK stock markets rose last week with large caps added 0.3% and mid caps rising 1.7%. The relative move in bond yields on the week explains some of the softening in the sterling to US dollar exchange rate, which closed down at 1.25. There was not much from the UK last week, although a purchasing managers index (PMI) reading on the constructions sector showed a continued slump in housebuilding.

The final Bank of England rate decision of 2023 is scheduled to take place this week, in between the Federal Reserve and European Central Bank announcements. There is widely expected to be no change in policy from any of the three major central banks and the focus will likely be more on to what extent they push back against current market pricing for reductions in the base rate next year. 

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