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Client Update - 8th December 2023

It was interesting to read this week that Britons are spending nearly three times more on Christmas today than 30 years ago (adjusted for inflation) as we splash out extra on presents, food and going out. Research suggests the average household will spend more than £1,800 on festivities this year, up 290 per cent on 1993 even accounting for inflation.

The study analysed the cost of a basket of 24 items, including some less obvious festive spending, such as travel costs to see relatives. In cash terms, households spent the equivalent of £624 in today’s money on festive outgoings in 1993, compared with £1,812 today. In 1993, a first-class stamp for sending Christmas cards was only 69p in today’s money, compared to £1.25 today. The cost of a turkey has also risen 46 per cent more than inflation. Rising costs of living keep coming, but better news is developing.

Back to the markets and the US is showing signs of a slow-down (remember bad economic news can often be viewed as good market news as investors hope for a rate cut due to a weakening economic outlook). Job openings have fallen to their lowest since March 2021, indicating a recalibration towards pre-pandemic conditions. This trend aligns with the Federal Reserve's (Fed) strategy of controlling inflation through high interest rates. In the UK, the labour market is mirroring this cooling trend.

Markets have recently bounced as investors feel the chances of a rate cut in early to mid-2024 have significantly increased. This goes against guidance from the Fed themselves and the market view versus the Fed’s view has become quite disconnected.

The next Fed rate announcement on the 13th December is eagerly awaited, and all attention was focused last week on whether Fed chairman Jerome Powell’s remarks at the end of the week would push back against the market consensus predicting rate cuts starting in early 2024. Powell attempted to do so in two lines of argument.

First, he emphasised that “it was premature to conclude with any confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease”. Second, he reminded markets that he and his colleagues on the Fed’s policy-setting committee “are prepared to tighten policy further if it becomes appropriate to do so”. However, these attempts proved unsuccessful, judging by the market reactions. One would expect these signals to partially reverse the eye-catching movement in bond yields observed in November — a fall of more than 0.60 percentage points for the 10-year Treasury bond means a 6% capital gain – good news for bond investors. Instead, yields fell by another 10 basis points on the day of Powell’s remarks, leading to markets pricing in a total of five cuts in 2024, with a notable probability of the first one coming as early as March.

There is a third peculiarity: the more markets diverge from the Fed’s signals, the more likely they are to push the central bank to adopt the path that is detrimental to the market itself. This is because markets’ demand for rate cuts in turn loosens financial conditions and heightens the Fed’s concerns about inflationary pressures, thereby delaying the rate cuts that the markets are betting on. Indeed, according to a Goldman Sachs index, November was among the largest monthly loosening’s in financial conditions on record, despite the Fed not actually doing anything.

As always, we have much to watch in the coming days and weeks. Markets are moving, the news is improving, and this is very heartening to see. Do have a good weekend.

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