- Weakening economic data in the US offers hope of an early end to higher-for-longer interest rates.
- The European Central Bank joins global peers in putting rates on hold.
- Bonds rally before retreating as central banks rein in the narrative.
It was a tale of two halves this week, with markets first rallying then curbing their enthusiasm in response to economic data and the latest pronouncements from policymakers.
US unemployment data initially lit a fire in bond markets, with a rise in unemployment offering a hint that tighter monetary policy was finally working its way into the real economy. Investors interpreted this as a sign that, all things being equal, the Federal Reserve could soon begin to backtrack on its recent monetary tightening trajectory.
Is unemployment on the rise?
In the UK, meanwhile, gilts yields fell as Bank of England policymaker Huw Pill argued it was “not unreasonable” to expect interest rates to be cut in 2024.1
Later in the week, however, the nascent mood of optimism fell victim to policymakers’ efforts to rein in the narrative.
First it was the turn of the UK policymakers, with the Bank of England’s chief economist suggesting rates would remain restrictive. Next it was the turn of Federal Reserve chair Jay Powell who warned against being ‘misled’ by data, adding that the central bank’s 2% inflation goal is ‘not assured’ and that it was prepared to tighten policy once more in response to pricing pressures.
Our managers' views
Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited, notes that the bar for additional hikes into next year is now high and would not be warranted in the absence of more persistent inflationary pressures.
“The market is pricing in front-end cuts of around 70bps in 2024 versus the just 30bps we saw in the middle of October,” she says. “Factor in the stronger tone in the US Treasury and Huw Pill’s more dovish commentary this week and we think there’s room to price more cuts in the front end of the UK gilt market and further outperformance against peers, but this will take time from here.”
Lewis Grant, Senior Portfolio Manager for Global Equities, notes how central bankers have been keen to quash expectations of rate cuts. Nonetheless, with indications of a softening US jobs market and falling energy prices, the mood has changed, he says. “The market is become more confident that, while rate cuts are not imminent, rises will soon be ruled out. This means an end to the ‘higher for longer’ narrative in favour of a new market mantra: ‘lower, but when?’.”
Pricing pressures have peaked
Both equities and bonds remained generally buoyant, fluctuating between gains and minor retreats in anticipation of an early interest rate Christmas present from the world’s central banks. The S&P 500 ended the week virtually where it began while the FTSE 100 gave up 0.8% from the week’s open.2
US Treasuries enjoyed a rollercoaster ride with yields on 10-year bonds dipping as much 2.29% from open by midweek before regaining lost ground by week’s close.
For further commentary from our fixed income team please see: Is ‘doing good’ too good to be true?
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1 UK gilts rally after official signals BoE is open to rate cuts in 2024
2 Source: Bloomberg as at 10 November 2023.
