Central banks took centre stage again during September, with the Federal Reserve (the Fed) kicking off the US interest rate-cutting cycle with a 0.5% reduction and the European Central Bank (ECB) announcing a second 0.25% cut. The Bank of England (BoE) decided to keep rates on hold, stressing the speed and size of cuts would depend on economic data.
Overall, investors appear to be buying into the idea of a 'soft landing', in which global economic growth slows gradually and a significant recession is avoided.
The other key development during the month was a package of stimulus measures from the authorities in China designed to support the nation's economy and revive its ailing property sector.
Following an interest rate cut in August, the BOE's Monetary Policy Committee voted by 8-1 at its September meeting to keep interest rates unchanged at 5%. This decision was in line with market expectations. In terms of the direction from here, the BoE is likely to continue to adopt a gradual approach to loosening policy, with policymakers carefully monitoring inflation and growth data.
All eyes were on the Fed when the long-awaited first interest rate cut finally arrived. The surprise, for some, was that it was 0.5% rather than 0.25%. On the day of the announcement the market did not react as much as some might have expected. Lower interest rates are generally positive for equity markets, because lower borrowing costs support companies. However, the larger cut could also suggest a more significant economic slowdown, and this may have caused some concern. This idea was shrugged off relatively quickly though and lower-than-expected jobless numbers helped the S&P 500 hit a new high. Generally, the US economy is slowing, but gradually, and some data releases (like the jobless claims numbers) are still surprising to the upside. This heightens expectations of a soft landing.
In June, the ECB was the first major central bank to reduce interest rates. Inflation has eased since then, so markets had fully priced in a second cut for September. The ECB did not disappoint and cut the deposit facility rate by 0.25% to 3.5%. Looking ahead, the bank's President, Christine Lagarde, continues to emphasise that further interest rate cuts will be dependent on economic data and decided on a meeting-by-meeting basis.
Japan has a new Prime Minister, Shigeru Ishiba, and the country will hold a snap general election at the end of this month. Although inflation currently sits at 3%, which is slightly higher than the target rate, the Bank of Japan held interest rates steady in September and does not appear to be in a rush to raise them from the current level of 0.25%. In the wider economy, exports and industrial production remain relatively flat.
The People's Bank of China announced a raft of monetary stimulus measures late in September, leading to a meaningful move in Chinese equities. The bank's main policy rate was cut by 0.2% to 1.5% and the required reserve ratio held by banks was cut by 0.5%. In an effort to stimulate the economy, mortgage rates and minimum deposit rates were lowered to support the beaten-down property sector, and a £53bn swap facility was introduced as a means to boost the lagging stock market which, prior to the announcement, was more or less flat year to date.
Markets reacted positively to the news, with Chinese equities rallying 21% in the last six trading days of September alone.
Elsewhere, tech-heavy markets such as Korea and Taiwan struggled as the artificial intelligence story continued to wane, and falling oil prices continued to negatively impact Latin American markets.
Bond markets appeared unfazed by the Fed's 0.5% rate cut, which was accompanied by 'don't expect us to cut 0.5% each time' messaging. Overall, investors saw the outcome as feeding into a 'soft- landing' narrative and yields* rose.
* Yield: Yield is the annualised expected return of holding a bond to maturity
Source: Morningstar Direct
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