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Weekly Market Update Monday 25th September 2023

With a number of central bank interest rate decisions announced throughout the week, investors had a whole host of data to digest. The resulting narrative, from the US Federal Reserve in particular, indicated higher rates for longer sending equity markets lower and bond yields higher for the week.

Upon the recent announcement from the US Federal Reserve to maintain the current interest rates, Jerome Powell's message was crystal clear: The Fed intends to uphold these rates until inflation convincingly approaches the 2.0% mark. The Fed, in its latest meeting, chose to keep interest rates unchanged at a range of 5.25% to 5.5%. However, they left the door open for the possibility of an additional rate hike and maintained their outlook for a peak fed funds rate of 5.6%. The new set of Fed projections also indicates a reduction in the potential rate cuts for 2024, dropping from a potential 1.0% to 0.5% in cuts for the upcoming year. This implies that elevated interest rates may persist for longer than initially anticipated.

Across the Atlantic, the Bank of England has also decided to hold its interest rates steady, with the Monetary Policy Committee voting by a narrow margin of 5–4 in favour of maintaining rates at 5.25%. Four members of the committee favoured a modest increase of 0.25 percentage points to 5.5%. The decision to hold appears to be a response to lower-than-expected inflation numbers, with prices rising by 6.7% in the year to August, lower than the 7% forecasts.

From a global perspective, the Organisation for Economic Co-operation and Development (OECD) has noted the increasingly visible impact of higher interest rates. While it has upgraded its estimate for global GDP growth this year to 3%, it has scaled back its forecast for the following year to 2.7%. The OECD emphasizes that monetary policy must remain restrictive until inflation is firmly under control, cautioning that the effects of rate increases will continue to ripple through economies for some time.

US equities and tech stocks experienced weekly declines of approximately 3% to 4%, marking their third consecutive week of retreat. European stocks also ended the week 1.98% lower, largely influenced by signals from central banks that interest rates will remain elevated for longer. Meanwhile, Japan's stock markets declined by 3.4% over the week, despite the Bank of Japan (BoJ) aligning with expectations by maintaining its current monetary policy and negative rate target. In contrast, Chinese equities saw a 0.47% rise, driven by growing optimism about the country's economic prospects.

The prospect of the Fed maintaining higher short-term rates for an extended period, combined with indications of robust economic growth, led to an increase in longer-term U.S. Treasury yields. The benchmark 10-year U.S. Treasury yield reached a 16-year high of 4.49%. The 2-year U.S. Treasury bond yield also surged to 5.20%. On the other hand, UK gilt yields decreased, with the 10-year yield falling to 4.25%, following the somewhat unexpected announcement from the Bank of England that interest rates would remain unchanged at their current levels.