A cut above the rest

• US and emerging market equities, which rose +1.9% and +1.8% respectively in sterling terms
• Gold, which advanced a further +1.2% in dollar terms

• Sterling, which weakened against the dollar, euro and yen
• Bonds, which were broadly weaker across sub-asset classes - UK index-linked gilts declined -0.7%

The US Federal Reserve (Fed) cut interest rates by 0.25% last week despite a stagflationary undertone to the US economy. The deposit rate is now 4.0% to 4.25%. Fed chairman Jerome Powell said that there is “no risk free” path ahead while trying to simultaneously suppress inflation and protect jobs – with the latter winning the tussle with policymakers this time. US President Trump’s first appointee to the Fed in his second term, Stephen Miran, voted for a more drastic -0.5% cut. While there are cracks in the US labour market, unemployment remains relatively low at 4.3%. So, talk of stagflation – a toxic mix of sluggish growth, high inflation and rising unemployment – seems premature. That said, the Fed may stand accused of cutting too late if the jobs market continues to weaken, given that lower interest rates take time to ease credit conditions throughout the economy. Equity markets had fully priced-in the rate cut with some hitting record highs, notably Japan’s Nikkei 225 topping 45,000 for the first time, while the S&P 500 breached 6,600. The Fed’s next rate decision is on 28-29 October.

Trump’s unprecedented second UK state visit took place amid much pomp and ceremony last week. From a market perspective the major announcement was that of a landmark UK-US tech deal, which will see the UK and the US co-operate across Artificial Intelligence (AI), quantum computing and nuclear energy. The UK government said that the Tech Prosperity Deal will see the UK and the US pool resources and expertise to foster emerging technologies, with the intention that this results in new healthcare, energy and development benefits across Britain and the US. US tech giants such as Microsoft, Nvidia and Google pledged to invest heavily into UK AI and wider technology infrastructure, with the £22bn investment from Microsoft over the next four years accounting for a significant chunk of the £31bn value the UK government ascribed to the deal. The deal is part of a wider initiative to strengthen economic ties with the US. The total value of US investment the UK government said it had secured amounted to £150bn – the vast majority of which comes via US private equity firm, Blackstone - and is to be deployed over the next decade. Prime Minister Starmer is clearly keen to court US investment to boost UK economic growth and this tech deal will undoubtedly be chalked up as a notable win. However, the trend amongst domestic businesses is one of slowing investment and hiring amidst higher costs, while there was less good news for industries outside of the tech sphere. A proposed deal to secure a 0% tariff on steel exports to the US was reportedly shelved, while pharmaceutical companies Merck and AstraZeneca have recently rowed back on UK investment plans.

As widely expected, the Bank of England (BoE) kept interest rates at 4% last week, with inflation remaining close to double its target rate. Prior to the Bank’s meeting, the UK Consumer Prices Index (CPI) was reported to have held steady at 3.8%, with food price inflation still high. Policymakers struck a cautious tone, weighing persistent inflation pressures against a gradually cooling jobs market. Unemployment remains at 4.7%, but payroll employment and job vacancy data are hinting at some weakness in the jobs market. Two of the nine members of the rate setting Monetary Policy Committee (MPC) voted for a cut to 3.75%, suggesting that rate cuts are still on the table – although market pricing is currently suggesting no further cuts in 2025. However, in a key move for government bond markets, the Bank did announce that it is to slow the pace of quantitative tightening, reducing its gilt sales to £70bn over the next 12 months (down from £100bn). The decision to slightly ease the monetary policy path likely reflects the MPC’s cautious view of economic conditions and the highly uncertain path for inflation. 

UK public sector net borrowing hit £18bn in August according to the Office for National Statistics, the highest level for the month in five years and some way ahead of consensus expectations of £12.5bn. Borrowing over the financial year to date is now £16.2bn higher than for the same period last year. The figures will no doubt add to pressure on Chancellor Rachel Reeves ahead of the Autumn Budget. Despite tax receipts increasing, higher spending and debt interest costs outstripped the higher income. Public finance data can be volatile on a month-to-month basis, meaning such upward pressure may not persist into the medium to longer-term. However, the latest data is likely to further heighten the need for tax hikes if the chancellor is to sufficiently plug the fiscal hole to keep to her self-imposed rules. 

• Gold: The price of gold hit yet another record high, breaching £3,700 (or £2,755) an ounce last week. Gold continues to surge as investors anticipate the Federal Reserve prioritising employment over suppressing inflation in the coming months 
• Alphabet joins the $3 trillion club: Google owner becomes the fourth company to reach this milestone, alongside Nvidia, Microsoft and Apple
• What’s Next: UK fashion retailer Next’s closely watched results saw it report a strong rise in pre-tax profits. However, it also claimed the UK can expect “anaemic” growth and declining job opportunities due to the prevailing government fiscal policy
• Aluminium price: Global aluminium prices are being driven by a squeeze on supply, rising demand and US tariffs
• Tesla share price rally: Tesla’s share price drove higher after CEO Elon Musk bought about $1bn worth of shares, stating that he wants to own at least a fifth of the company to protect against activist investors or a takeover
• EU sanctions: The EU is planning to sanction more Chinese companies linked to Russia’s war effort in Ukraine. It is hoped that the move will help persuade the US to further increase Russian sanctions too

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.