Multi-Manager - will interest rates ever slow economies down?
Insights

Multi-Manager – will interest rates ever slow economies down?

As a proud Welshman (don’t mention the rugby please) I have to start my email on March 1 by saying Dydd Gŵyl Dewi Hapus - Happy St David’s Day

The rugby last weekend was arguably more exciting than markets this week, with most days very quiet for news flow, and the major highlight being the US Core PCE numbers, which is the Federal Reserve’s preferred measure of inflation. The lack of nasty surprises in the data was enough to push US equities to fresh all-time highs yesterday. We’ve also seen Japanese, Indian and European indices at record highs over the week.

The US PCE data showed inflation slowing to 2.4% year on year in January, down from 2.6% in December, in line with expectations. The perceived risk was the data not slowing, pushing back even further expectations of rate cuts. Therefore, markets breathed a sigh of relief that the data contained no surprises. Elsewhere in the economic numbers, India reported its GDP data for the fourth quarter of 2023, showing year on year growth of 8.4%, well ahead of the 6.6% expected. Thus, Indian equities were trading at all-time highs today. The other economic data of note was the flash PMI numbers, published last Friday, but too late to be included in last week’s update. The overall tone of the data was positive, with the US, UK and eurozone figures all moving higher, though the eurozone data was still in “contraction”. The UK data was well into “expansion” territory, pointing to positive economic growth in the first quarter should this trend continue. Manufacturing continues to be weak in the UK but this is being outweighed by the strength in the services sector.

As we start a new month, and after a strong start to the year in some markets, it’s a good time to question if the current market momentum can continue. US and Japanese equities have carried on leading markets higher, as we saw in 2023, and investor sentiment gauges are approaching euphoric levels. The US market has seen some more breadth to the recent rally, even if most of the headlines continue to be around the “Magnificent 7” stocks and Nvidia in particular. Earnings season, outside of the biggest companies, has been somewhat mixed, but with economic numbers in the US still solid, the backdrop is still supportive. Even in Europe and the UK, there are hints of a turn in the data, suggesting the recession will have been short lived.

It is impressive that equity markets have performed so well thus far this year, particularly in the US given the interest rate backdrop, with expectations for rate cuts shifting so much since the start of the year. On January 12, futures markets were pricing 168 basis points of rate cuts from the Fed this year. The Fed’s own “dot plot” pointed to 75 basis points of cuts when they last updated their predictions for rates in December. Today, futures markets are pricing around 80 basis points of cuts this year. Thus, markets have followed the Fed’s guidance, with several Fed speakers emphasising the need for patience and the difficulties of the “last mile” to bring inflation back to targets along the way. The backdrop to this messaging from the Fed has been a US economy that is proving resilient and may well continue to do so if expectations of various tax cuts (it’s an election year remember) prove correct.

Inflation has also proved sticky in some places such as services, and housing sector inflation, which lags other inflationary data, has taken time to roll over. However, the trajectory of inflation remains pointed in the direction of rate cuts, which seems more likely much later in the year, once the Fed has digested more inflationary data and had more insight on the path of the economy. There has even been some chatter that the next move in interest rates will be higher. While we have already seen bond yields, which move inversely to prices, move significantly higher over the year, as economic concerns dissipate, and expectations shift further out regarding when central banks will cut rates, that is definitely not priced into markets.

The outlook elsewhere is mixed. China remains under a dark property shaped cloud for now, and while it is clear the authorities are looking to support markets, for investors to take a more positive view on the country, it seems that more significant stimulus is needed rather than the consistent trickle of minor policy changes we have seen so far. Closer to home, the UK and eurozone appear to be showing signs of “green shoots”, dare I say it. However, a return to strong growth appears unlikely, not least because while interest rates will likely fall, they will not fall by far, and on the fiscal side, the piggy bank is empty. Japan remains somewhere that does look interesting. Though growth may well remain volatile, the normalisation of policy from the Bank of Japan, and continued shift in how companies allocate capital towards more shareholder friendly outcomes should be a tailwind.

Markets in some places do have some strong momentum for now, not least the US, which seems to be following the usual trajectory in an election year. If this continues to be the case, we may see some consolidation soon as the primaries process firms up and the market starts to ponder over the policy consequences of the Presidential candidates. We also need to keep a close eye on the economic data – history, and my economics textbooks, shows monetary policy works with a lag. We are yet to see the full impact of rate hikes – helped by the fact that many households and corporates are still yet to see the impact of the past two years of policy normalisation. The lag between rate hikes and the full impact on the economy may well have dissipated for this reason; financial conditions remain benign and credit remains available. Hence inflation may take a little longer to come down, but the worst-case economic outcomes from such an aggressive round of interest rate hikes look to have been avoided.

Have a good weekend,

Kind regards,

Anthony.

1 March 2024
Anthony Willis
Anthony Willis
Investment Manager
Share article
Share on linkedin
Share on email
Key topics
Related topics
Listen on Stitcher badge
Share article
Share on linkedin
Share on email
Key topics
Related topics

PDF

Multi-Manager – will interest rates ever slow economies down?

Risk Disclaimer

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

Related Insights

16 April 2024

Adam Norris

Investment Manager

Fund Watch Q1 2024

We analyse thousands of funds each quarter – in FundWatch we highlight the elusive few that manage to outperform on a consistent basis.
Read time - 8 min
12 April 2024

Anthony Willis

Investment Manager

Multi-Manager People’s Perspectives: Is the US economy running too hot to allow the Fed to cut rates?

It has been a tougher week for equities and bonds, particularly in the US, as economic data once again weakens the narrative around interest rate cuts being just around the corner.
Read time - 4 min
5 April 2024

Anthony Willis

Investment Manager

Multi-Manager People’s Perspectives: Forget about ‘landings’ – should we be focusing on the economic upturn?

Financial markets saw a quiet week in the run up to the Easter break but the past few days have been a lot busier with the usual start-of-month deluge of economic data.
Read time - 5 min
17 April 2024

Jamie Jenkins

Managing Director, Head of Global ESG Equities

In search of sustainability – following Highway 101

Travelling down the US west coast we met 25 companies in five days. Learn more about the tech and healthcare businesses shaping our future.
Read time - 3 min
16 April 2024

Fixed Income Desk

In Credit - Weekly Snapshot

In Credit Weekly Snapshot – April 2024

Our fixed income team provide their weekly snapshot of market events.
Read time - 5 min
16 April 2024

Adam Norris

Investment Manager

Fund Watch Q1 2024

We analyse thousands of funds each quarter – in FundWatch we highlight the elusive few that manage to outperform on a consistent basis.
Read time - 8 min
true
true

Risk Disclaimer

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Our Capabilities

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium