This week we’ve seen the US and China reach agreement on trade and another rate cut from the Federal Reserve. In markets, equities in many regions have tested new highs as investors remain focused on the positives. We discuss the issues and risks caused by a lack of US economic data and explain why – for now – we’re happy to maintain our equity overweight.
Top stories
- President Trump said he had an “amazing meeting” with President Xi Jinping at the Asia Pacific Economic Co-operation forum in South Korea, resulting in the US halving fentanyl related tariffs on Chinese goods, while Beijing will pause sweeping restrictions on the export of rare earth materials. Trump said China had also agreed to resume soybean purchases and he planned to visit China next April, with President Xi visiting the US later next year. Trump said they would sign a trade deal “pretty soon”, adding, “it’s a one-year deal that will, I think, be very routinely extended”. Scott Bessent, US Treasury Secretary, has for some time spoken of the “framework for a deal”, though this was recently de-railed by China’s rare earth export restriction announcement and President Trump’s threat of 100% tariffs as a result. President Xi made his first comments since the meeting earlier today, insisting his country remains committed to an open world economy and urging countries to “work together to maintain stable and smooth supply chains.”
- The US Federal Reserve (Fed) cut interest rates as expected by 25 basis points to 3.75-4% Fed Chair Jay Powell said that a subsequent cut at the December meeting was “not a foregone conclusion”. Powell added “I always say that we don’t make decisions in advance. But I’m saying something in addition here: that it’s not to be seen as a foregone conclusion – in fact far from it.” Powell noted the absence of adequate economic data resulting from the ongoing government shutdown was also a factor; “what do you do when you’re driving in the fog? You slow down”. The market pricing for a December cut fell from 87% probability to 74% after Powell’s comments. As expected, the Fed also announced it was ending its quantitative tightening programme amid concerns over a tightening in short term funding markets for some banks. From the start of December, the proceeds of maturing debt would be reinvested back into government bonds. Powell said there had been “a more significant tightening” in money market conditions over the past three weeks. “We’re shrinking the balance sheet at a very slow pace… there’s not a lot of benefit to shrinking it by the last few dollars.”
- As expected, both the Bank of Japan (BoJ) and European Central Bank (ECB) left rates unchanged. BoJ Governor Kazuo Ueda maintained his position that the BoJ needed more data before shifting their position, suggesting the shunto pay round of negotiations next spring would be crucial as they seek to separate what they call “actual inflation” from the consumer price index. The ECB remained on hold at 2% for the third consecutive meeting, in line with expectations that have been shaped by ECB President Christine Lagarde repeatedly stating that monetary policy was “in a good place”. Lagarde said the eurozone economy “has continued to grow despite the challenging global situation” noting the labour market was “robust” and private sector balance sheets were “solid”. Lagarde commented that the inflation outlook was “broadly unchanged” and that policymakers would do “whatever is needed to stay in a good place”.
By the numbers
- £20bn – the size of the ‘black hole’ in the UK’s public finances expected as a result of the productivity downgrade from the Office for Budget Responsibility. Given the need for additional fiscal headroom, the Chancellor likely needs to find around £30 billion in next month’s budget.
- 3.0% – US inflation in September, which was lower than expected but still a 16-month high. The inflation data for September was released despite the government shutdown, which is the second longest on record. Other data, including the employment report, remains on hold.
- Five – the number of candidates left for the role of US Federal Reserve Chair, to replace Jay Powell next May. Treasury Secretary Scott Bessent will present his shortlist to President Trump for consideration, with a decision expected before year end. The shortlist includes three current or former Fed Governors, the Director of the National Economic Council and a Managing Director at BlackRock.
- 81% – the number of UK adults who believe Halloween is “more commercialised” than a decade ago. Only 81%? UK Halloween spending is expected to increase by 3.2% this year, to £537 million. That’s a lot of fancy dress costumes and Haribo!
Market movers
This week’s Fed meeting highlighted that their focus is more on employment than inflation right now. Since the start of 2020, US inflation has now averaged 4%, double the Fed’s target. The last time Fed cut rates with inflation this high was October 2008, shortly after the Lehman Brothers collapse when unemployment was 6.5% and on its way to 10% 12 months later as the financial crisis unfolded. Unemployment at the end of August (the last data available) was 4.3%, up from a low of 3.4% in April 2023. The Fed said the downside risks to employment “rose in recent months” with Powell commenting that “conditions in the labour market seem to be gradually cooling”, though he added that the immigration crackdown was having an impact: “there’s not a supply of workers showing up for jobs”. Powell noted “strongly differing views” within the Fed, with some members primarily concerned about a slowing labour market but others warning that still elevated inflation left limited room for further easing. A further rate cut in December still looks more likely than not, but if there is plenty scope for the data, if and when it is released, to shift expectations on how far and fast the Fed will cut.
The investment lens
With US growth ticking along reasonably well, benign growth elsewhere, US tariffs failing to have a significant negative impact, and corporate earnings season suggesting the AI theme still has some momentum, the backdrop remains supportive. Indeed, the market mood appears to be not just ‘glass half full’ and more like ‘glass almost full’. We’ve seen record highs across stock markets from the UK to Japan, the US, Emerging Markets and Europe over recent days, reflecting this positive backdrop. Of course, this means the market is not priced for problems, but with the prevailing view that inflation is not a concern – helped by central banks, not least the Fed, cutting rates – there still appears to be upside momentum. As ever we are mindful of potential risks – when the US government does reopen the publication of delayed economic data may change the narrative, and ‘events, dear boy, events’ (to misquote former UK PM Harold Macmillan) can always derail risk appetite. But many of the top-down concerns around tariffs, the US/China relationship, French and Japanese politics and geopolitics have abated, and seasonality is now a tailwind for markets. For now, we continue with our positive stance on risk, maintaining our equity overweight.
