In December markets rallied as we saw confirmation that monetary policy makers in the US are primed to cut interest rates in the near future.
The Federal Reserve’s (FED) recent dot plot of Federal Open Market Committee (FOMC) member’s future interest rates expectations seems to now confirm that we have likely reached the peak. The FOMC indicated that there would be three cuts in 2024, four cuts in 2025 and three in 2026. The market is now pricing in yet more aggressive decline in rates over the next two years.
Given the global importance of US borrowing costs on the valuation of financial assets, we saw developed economy equity markets rally across the board with many reaching new all-time highs.
In the UK, to add to the positive sentiment, we saw a further downside surprise in the inflation data. The core consumer price index (CPI) which ignores more variable elements such as energy, fell in November from 5.7% to 5.1%. This was much lower than the 5.6% expected by economists. The market is now expecting interest rate cuts to begin in the UK from spring and that 5.25% will in fact be the peak for the UK bank rate in this cycle. Far lower than the 6.5% which was at one-point priced in.
Looking to 2024, in contrast with expectations at the start of this year, there is much to be positive about. Markets should be buoyed by further cuts to interest rates and households have a decreased threat from higher mortgage rates. In April, we have increases to state pensions which will benefit 20 million households, a rise in the national living wage and a decline in the energy price cap of 14%. All whilst inflation generally is set to fall further to around 3% which means a boost in real disposable incomes.
2024 will see 40% of the global population have a general election. In the UK an election is inevitable with a Labour government the most likely outcome. This poses little risk to markets and business with a pro-growth agenda front and centre. This contrasts with other developed economies which are still experiencing waves of populism.
INVESTORS COMMITTED TO UK EQUITIES
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The Leeds Collective
Common sense investors committed to UK Equities.
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