Central bank policy was once again centre stage this week as investors sought clarity on the future direction of rates in the US and the UK.
In the event, the outcome was something of an anti-climax, with the Federal Reserve holding its benchmark fund rate unchanged at 5.25-5.5%. Taking its cue from weaker-than-anticipated inflation data, the Bank of England (BoE) steered a similar course, maintaining its own benchmark rate at 5.25%.1 This bucked the trend set by the European Central Bank (ECB) last week where it announced a tenth consecutive rate hike to an all-time high of 4.00%.
For investors, central bank action – or, rather, this week’s lack of it – did little to dispel a mood of uncertainty. Yields on the benchmark 10-year bond US Treasury reached 4.48%, a 16-year high, in trading Thursday (21 September). Equities declined, with the S&P500 falling 2.70% over the course of the week to Thursday.2
Complicating the picture was the latest eurozone HCOB Flash Composite PMI Output Index , a measure of manufacturing and services sector activity, which came in below expectations on Friday. Europe’s region-wide Stoxx Europe 600 fell 0.40% in response, while France’s Cac 40 and Germany’s Dax both declined 0.50% in early trading Thursday morning.
Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited, noted that the absence of surprises on the interest rate front was mirrored in the accompanying commentary by Fed Chairman Jerome Powell. Nonetheless, he said, the Fed’s longer term outlook had given investors some food for thought.
“While Powell’s remarks offered little new substance, he did hint at a hawkish skew to the Fed’s outlook,” said Grant. “’Higher for longer’ is a mantra repeated widely, but how long is longer? Clearly the prevailing definition is not in line with Powell’s comments, as US markets – and particularly the more growth-oriented Nasdaq – fell sharply.”
Our advice to investors: get used to it. Now that macro concerns about the Fed, inflation, recession and China are fading... we’re going to have to make money the old-fashioned way
Stephen Auth, Chief Investment Office for Equities at Federated Hermes, highlighted a variety of headwinds facing investors in recent months – including weak China data and concerns about how the inflation squeeze would affect consumer spending – but he also pointed to a series of offsetting ‘silver linings’ that had offered support to investors.
“These seem to have been just enough to keep the bulls on their feet and struggling forward,” he said. “China keeps dribbling out moderately helpful doses of stimulus measures, a softening labour market and China deflation are keeping inflation expectations moderate, and back-to school-spending is coming in as modestly positive (even if below last year’s heady growth)
“Our advice to investors: get used to it. Now that macro concerns about the Fed, inflation, recession and China are fading, and valuations have risen in advance of an expected better, more ‘normal’ year in 2024, we’re going to have to make money the old-fashioned way: grinding it out in earnings, along with the buybacks and dividend payments that derive therefrom.”
The commodities view
Meanwhile, recent moves in commodity pricing have done little to dispel the mixed messages on inflation. Wheat prices reached a new three-year low this week on the back of a bumper crop in Russia – even as the invasion of Ukraine continues to threaten exports through the Black Sea. Other war-affected commodities – namely fertilizer and natural gas – have also come off previous highs this year (see charts below). Bucking the trend is oil, where cuts to output by Opec and export restrictions on petrol and diesel imposed by Russia this week have contributed to a spike in prices.
Commodity inflation concerns: Goodbye to all that?
Select commodity prices have moderated over the past 12 months but oil is adding to price pressures.
Wheat (USX per bu)
Fertilizer (US$ per short ton)
Natural gas (US$/MMBtu)
Oil: WTI, US$/barrel
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1 The Financial Times, as at 21 September 2023.
2 Source: All data: Bloomberg as at 22 September 2023.
