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Interest rate outlook boosts equities

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers the week to 22 March 2024.

| 10 min read

Equities were boosted by positive news on interest rates. The markets interpreted the result of the Federal Reserve’s latest meeting as dovish, despite the central bank keeping interest rates unchanged. Bank of England governor Andrew Bailey has said interest rate cuts could come before inflation hit its 2% target after the central bank left them unchanged at 5.25%. Reddit also had a successful initial public offering.

Over the week, the blue-chip FTSE 100 index was up 2.8% by mid-session on Friday, with the more UK-focused FTSE 250 trading 1.2% ahead.

Economics

The S&P 500 hit a new all-time high after the Federal Reserve (Fed) maintained its dovish tone, despite the recent uptick in inflation. Many in the market were worried that higher inflation readings since the turn of the year would force the central bank to take one of the expected interest-rate cuts off the table. However, this was not the case and the central bank held firm. The Fed kept interest rates on hold and the “dot plots” released after each meeting indicated that members of the voting committee still expect to see three interest rate cuts this year. Futures markets and guidance from Fed officials has now converged, after a period of over-optimism by markets on the pace of interest rate cuts. Fed chair Jerome Powell said prices pressures will continue to ease and it will likely be appropriate to start cutting later in 2024. Markets applauded the steady view and interpreted the accompanying statements as dovish.

Bank of England governor Andrew Bailey has said interest rate cuts could come before inflation hit its 2% target after the central bank left them unchanged at 5.25%, their highest for 16 years. "We don't have to actually get inflation all the way back to target… to cut rates for instance, what we have to do is be convinced that it is going there," Mr Bailey said in an interview. This followed data that showed that UK inflation fell to its lowest level in almost two and a half years in February, as price rises for food and eating out slowed sharply. Last month’s fall in the annual rate to 3.4% from 4% in January means the cost of living is rising at its slowest pace since September 2021. This was better than market expectations of 3.5%.

There was a major economic milestone in Japan, as its central bank raised interest rates for the first time in 17 years. The Bank of the Japan (BoJ) increased its key interest rate from -0.1% to a range of 0%-0.1%. It comes as wages have jumped after consumer prices rose. The increase means that there are no longer any countries left with negative interest rates – in 2016, the bank cut the rate below zero to stimulate the country's stagnating economy. The central bank also abandoned a policy known as yield curve control (YCC), which saw it buying Japanese government bonds to control interest rates. Expectations that the BOJ would finally raise rates had been growing since governor Kazuo Ueda took office in April last year. The latest official figures showed that even though the rate of price rises has been slowing, Japan's core consumer inflation held at the BoJ’s 2% target in January.

As investors look forward to a cut in interest rates later this year, why has there not been a bad recession in this economic cycle?

Geopolitics

As part of it plan to encourage production of cutting-edge technology on home territory, the US government awarded Intel $8.5bn in grants and as much as $11bn in loans to help fund an expansion of its semiconductor factories. The funds came via the 2022 Chips and Science Act, one of Joe Biden’s signature legislative accomplishments.

US congressional leaders finally unveiled a $1.1 trillion bipartisan spending measure for defence, homeland security and other programs early. The Republican-controlled House of Representatives will vote on the package on Friday, leaving the Democratic-majority Senate only hours to pass the package of six bills that covers about two-thirds of the $1.66 trillion in discretionary government spending for the fiscal year that began on 1 October.

Collapsed Chinese property giant Evergrande and its founder, Hui Ka Yan, were accused of overstating company revenues by $78bn.

Collapsed Chinese property giant Evergrande and its founder, Hui Ka Yan, were accused of overstating company revenues by $78bn in the two years before it defaulted on its debt. The country's financial markets regulator has fined the company's mainland business Hengda Real Estate $583.5m. Mr Hui was also fined $6.5m and faces being banned for life from China's financial markets. Mr Hui allegedly instructed staff to "falsely inflate" Hengda's annual results in 2019 and 2020, according to the Chinese regulator.

President Trump’s enthusiasm for more oil and gas output was well known and understood when he was in office – but Joe Biden has raised production too. The US goes for more oil and gas output.

Company news

Shareholders called for a breakup of fast-moving consumer goods (FMCG) group Reckitt, after a near 30% fall in its share price in the year to date. Earlier this month, an Illinois jury ordered Reckitt unit Mead Johnson to pay $60m in compensation to the mother of a premature baby who died of an intestinal disease after being fed the company's Enfamil baby formula. Reckitt plans to appeal the verdict. The company also missed fourth-quarter market expectations for sales growth when they were issued last month and said an investigation showed some employees had under-reported liabilities in the Middle East.

The market reacted positively to a new strategic update from FMCG peer Unilever. Hein Schumacher, who started in the chief executive role in July last year, announced plans to spin off its ice cream business, which owns brands such as Magnum and Ben & Jerry's. He also announced about 7,500 job cuts, about 6% of its total workforce. Under its previous chief executive, Alan Jope, the company was criticised for its vast array of brands – which numbered almost 400 – which distracted management from the company’s best performers. In October, Mr Schumacher said the company would focus on 30 key brands which account for 70% of its sales, work on improving its gross margin and not undertake any major or transformational acquisitions.

The US filed a major lawsuit against Apple, accusing the tech giant of monopolising the smartphone market and dampening competition. The Justice Department alleges the company abused its control of the iPhone app store to "lock in" customers and developers. Apple has vowed to "vigorously" fight the lawsuit and denies the claims.

The sluggish Chinese economy is hitting Western businesses operating in the country. Shares in German-listed Siemens fell after management said disappointing demand in China for its key digital industries division was weighing on performance. New orders at its factory-automation products have been more subdued than expected in what is the company’s third-biggest market since the start of the year. China’s economic stimulus “doesn’t immediately translate into new orders at the moment,” Chief Financial Officer Ralf Thomas said at an investor conference in London.

Shares in major luxury goods companies fell after a profit warning from France’s Kering, which owns the Balenciaga, Bottega Veneta, Yves Saint Laurent and Alexander McQueen brands, amongst others. The warning was blamed on its Gucci brand, which generated about two-thirds of its operating income and sales in Asia-pacific fell sharply. There were hopes that the luxury industry was starting to see a recovery following LVMH’s results earlier this year, with many analysts pointing to the fact that Gucci is in the middle of a turnaround under new management and a new creative director, Sabato de Sarno, but this has yet to bear fruit.

Nvidia chief executive Jensen Huang presented the company’s new chips, which aim to extend his company’s dominance of this part of the artificial intelligence (AI) market. A new processor design called Blackwell is multiple times faster at handling the models that underpin AI. That includes the process of developing the technology — a stage known as training – and the running of it, which is called inference.

US-listed Micron Technology added to the positive tone in the US following the Fed’s statement. The computer memory and data storage group gave a surprisingly strong revenue forecast for its current quarter as it catches the wave of demand for artificial intelligence hardware.

Social media site Reddit's shares have closed 48% higher on the company's first day of trading on the New York Stock Exchange on Thursday. On Wednesday, Reddit revealed that it had priced its shares at $34 each, near the top of a marketed range. It was one of the biggest ever initial public offerings (IPO) by a social media platform.

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Interest rate outlook boosts equities

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