It’s a wonderful life
• Christmas came early for investors with strong gains realised for most equity and bond markets during November.
• Global inflation continues to fall. UK inflation was down to 4.6% in October. UK supermarket price inflation slows to a 16-month low.
• Key global central banks chose not to hike interest rates. Hopes of rate cuts in 2024.
• UK Chancellor Jeremy Hunt unveiled his Autumn Statement. National Insurance to be cut by 2%.
• UK prime minister Rishi Sunak made several changes to his cabinet. Suella Braverman leaves her role as home secretary and former prime minister David Cameron returns, as foreign secretary.
• UK house prices rose in October for the first time in six months, according to Halifax.
• Company insolvencies in England and Wales rise to the highest level since 2009.
• The Chinese economy fell back into deflation.
• Sam Altman, CEO of OpenAI, the technology firm behind ChatGPT, was fired by the board and then rehired a week later, with a new board announced.
• Net UK immigration reached an all-time high in 2022, as it registered 745,000 net arrivals.
• Elon Musk’s Space X’s Starship rocket reached space for the first time but exploded before completing the full mission.
Christmas came early for investment markets during November, with most posting gains over the month. Market participants were buoyed as inflation fell and the labour market softened, reducing the need for central banks to continue hiking borrowing rates in 2024. Bond yields dropped, causing bond prices to rise, and equity markets followed suit.
Data released during the month showed that US inflation fell sharply to 3.2% in October, with the US Federal Reserve (Fed) opting to keep their key borrowing rate unchanged at 5.25%-5.5%. This is a 22-year high, but Fed President Jerome Powell warned that there was “a long way to go” to return inflation to its 2% target. UK inflation fell sharply to 4.6% in October, down from 6.7% in the previous month, driven by a slowdown in services inflation. Euro area inflation fell to its slowest pace in over two years. However, economic growth is also slowing in much of Europe. The UK economy stagnated during the third quarter and the euro area economy contracted by 0.1% in the third quarter, increasing the odds of a technical recession in the second half of 2023. The Bank of England kept interest rates on hold during their November meeting. Slowing growth also likely contributed to European Central Bank president Christine Lagarde saying during the month that interest rates would not be cut for at least “the next couple of quarters”.
During the month, Chancellor Jeremy Hunt unveiled his Autumn Statement, which focussed on growth for the future. It often seems strange that we live in a country where the public finances are run on the basis of two annual events that are constantly trying to “one up” the previous statement with surprise changes to the tax system. The short-term nature of current policy decisions makes it quite difficult to plan too far ahead and therefore stimulate growth. Throw in a general election in 2024 when most Tory policies could be unwound, and we hardly have a confident setting for the UK economy on which businesses can commit to a long-term spending plan.
Sticking closely to the Chancellors “Fiscal Rule” (the aim of which is that public debt as a share of GDP should be lower in five years’ time), he dished out an increase in benefits and cut National Insurance, most of this was already being paid for by his previously enforced freeze of income tax thresholds that have remained in place despite record high inflation persisting for longer than hoped. The favourable rise in tax receipts has left the Chancellor with £30bn of headroom below his fiscal target that he could either spend or save – he chose to spend.
There is a certain amount of irony in the Government pledge to “take decisions for the long term” when in the last 18 months fiscal policy has been something of a rollercoaster ride, and by Hunt’s own admission, the “long-term” horizon is only five years. He did acknowledge that the overall tax burden had risen once more, largely due to the government paying back the debt incurred during the Covid pandemic and covering rising energy costs. The Chancellor believes that funding business expansion today, will lead to a stronger economy that in turn will create a bigger tax pot from which to support public services in the future.
The US Dollar experienced a significant decline during the month driven by investors increasing belief that US growth is slowing (despite third-quarter growth being revised up to 5.2%) and that the Fed will cut interest rates in the first half of 2024. This drove the largest monthly outflows from the dollar since November 2022. US equities produced a solid return in Sterling terms over the month, gaining 4.5%, despite the headwind from a weaker dollar.
Despite its slowing economy, European equities broadly posted strong returns during November (+5.8%), The Chinese economy fell back into deflation in October, driven by weak consumer spending. Chinese equities fell again in November, to continue their annus horribilis in 2023.
Elsewhere, oil prices continued to fall on concerns of falling global demand (particularly from China), rising US crude stockpiles, and an announcement of cuts from OPEC+ producers for Q1 2024 that fell short of market expectations.
All in all, it was a good month for investment markets. Let's hope the holiday cheer continues into the new year!
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