Market report: Interest rate cuts eyed, TikTok in court and OECD warns on UK debt
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Markets are in ‘wait and see’ mood amid high anticipation of the crunch interest rate decision from the Federal Reserve this week, with a vote also eyed at the Bank of England. The FTSE 100 is set to be little moved in early trade, particularly without many cues to take from Asia, where holidays have closed multiple exchanges. Another disappointing data set from China, indicating a further slowdown in industrial production, is also set to weigh on commodity-focused stocks, like miners. This evidence of continued struggles in the world’s second-largest economy doesn’t bode well for the luxury goods market, which is so sensitive to Chinese consumer sentiment.
All eyes will be on the key September Fed meeting this week, with a decision on interest rates due on Wednesday. Investors remain split about the size of the Fed rate cut, which the policymakers are expected to deliver. More bets are being put on the likelihood that there may be 50bps reduction announced, which has pushed down the dollar slightly, in an extension of its recent losses. Even if a smaller rate cut is delivered, it’ll raise expectations for a more aggressive loosening of policy in November and December, with 100bps of rate reductions by the end of the year priced in by markets. We are set to see the start of an eager easing cycle, given that inflation is heading towards target and demand is being squeezed out of the economy. A quick succession of cuts is expected, to try stop the slowing US economy going into reverse.
The ECB has been well ahead of the curve and has reduced rates for the second time this year, prompting a positive end to trading last week. Bank of England policymakers aren’t looking quite as likely to join in the rate cut party this month. Even though economic growth is clearly flagging, policymakers may still to be wary and keep rates on hold. The once red-hot labour market may be well on the way to cooling down, with regular pay growth excluding bonuses, falling to 5.1%, it still might be weeks rather than days before borrowing costs come down. The rate of wage increases is still running at more than twice the rate of consumer price growth and there are still niggles of worry that those high wage bills might be passed on as higher prices for goods and services. Although bets for a BofE rate cut have slightly increased in recent days, financial markets are pricing in a 70% likelihood that the Bank will opt for the hold option on Thursday. Although two interest rate cuts are priced in before the end of the year, it’s looking likely that they will land in November and December. A lot is likely to be riding on August’s CPI number, due out on Wednesday. Although inflation is expected to have crept up a bit more, any signs that prices in the services sector are being tamed more effectively could persuade more policymakers around the table to opt for a cut on Thursday.
The OECD has weighed in on the UK’s precarious fiscal position, urging the government to act to stabilise the nation’s finances. The warning, in itself, is unlikely to change policy but will cement expectations that Chancellor Rachel Reeves will go on a tax raising spree at the upcoming Budget. The OECD’s suggestions include re-assessing the generous triple-lock pension commitment, axing stamp duty to free up the housing market and recalculating council tax bands. The global policy organisation also recommends tinkering with the government’s self-imposed fiscal rule to increase investment and boost growth. There has been a big fear of upsetting bond investors, but specifically ring-fencing additional borrowing to help boost longer term growth prospects, is unlikely to lead to a gilt market strop out.
TikTok is facing its first day in court as it tries to overturn a ban in the US, unless its Chinese owner ByteDance sells the app. The social media site is calling a number of its highly popular content creators as witnesses, some of whom are also suing the Department of Justice for infringing their free speech rights. The furore shows the extent to which social media networks have become such an integral part of business infrastructure. It’s a reminder to entrepreneurs to diversify as they grow and build communities on multiple platforms. TikTok is clearly a precarious platform to rely on, however much users are glued to streams of the latest video trends. It also shows the extent to which the fresh splintering of trade relations between the US and China is affecting everything from semi-conductor chip sales and AI development to social media streams. The likelihood of even more delineated US and Chinese spheres of influence across the world is higher, so brace for fresh geo-political fracture ahead.
Oil prices have risen slightly, with Brent Crude trading towards $72 a barrel. With a flurry of rate cuts expected from the Fed, pushing down the dollar, it’s giving some support to prices, with Brent hanging onto last weeks’ gains. A cheaper dollar makes the commodity less expensive, which may help boost demand. However, for now, there is likely to be a ceiling kept on prices, as traders reflect on lower demand from China, as the industrial sector continues to decelerate, and a slowdown in the US economy. The re-start of refining activity after the hurricane scare last week, has also allayed supply concerns.’