European stock markets pushed higher on Wednesday as traders await the final interest rate decision of the year from the US Federal Reserve.
In London, the FTSE 100 (^FTSE) was trading 0.3% by afternoon trade, buoyed by a weaker pound which fall on the back of the UK economy shrinking more than expected in October. Meanwhile the CAC (^FCHI) gained 0.2% in Paris, and the Frankfurt DAX (^GDAXI) was edged up 0.1%.
“After pushing up to new record highs yesterday the DAX and CAC 40 ended up closing lower on the day, as caution set in ahead of today and tomorrow’s final central bank meetings of 2023, starting with the Federal Reserve later this evening,” Michael Hewson, chief market analyst at CMC Markets UK, said.
“US markets, on the other hand continued their recent optimistic bias with both the Dow and S&P 500 closing at fresh 2023 highs, after US inflation slowed modestly to 3.1%, even as bond yields edged higher.”
Read more: Bank of England poised to leave interest rates on hold
The S&P 500 (^GSPC) rose 0.5% on Tuesday, and the tech-heavy Nasdaq (^IXIC) was 0.7% higher. The Dow Jones (^DJI) advanced 0.7% in New York.
Hewson added: “When the Federal Reserve kept rates unchanged back in November for the second meeting in a row there was still the distinct possibility that the final meeting of 2023 would provide the possibility of one more rate rise to round off the year in line with Fed policymakers dot plot forecasts of 5.6%.”
It came as UK gross domestic product (GDP) contracted by 0.3% on a monthly basis, according to the latest data from the Office for National Statistics (ONS). This followed growth of 0.2% in September as economists had expected a contraction of 0.1%.
Read more: Pound falls against the dollar after weak UK GDP data
Services output fell by 0.2% in October 2023, driven by a fall in information and communication, and was the main contributor to the fall in growth in GDP. Production and construction also fell sharply, by 0.8 % and 0.5% respectively.
The news meant interest rate cuts from the Bank of England are more likely next year. Financial markets are now predicting that there will be 95 basis points of cuts by the Bank of England next year, which would bring rates down to 4.25%.
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Wall Street set to open higher
We have an hour to go before Wall Street opens, so let’s see how things are shaping up across the pond…
US stock indexes have edged higher ahead of the Federal Reserve’s final monetary policy meeting of 2023. The central bank is expected to leave interest rates on holda at 22-year highs.
Recent data has cemented expectations that rates have peaked, helping to send Wall Street’s main indexes to close at fresh highs of the year on Tuesday.
The Fed will announce its decision at the end of its two-day meeting at 7pm UK time, which will be followed by a press conference from chairman Jerome Powell.
S&P 500 futures (ES=F) are up 0.1%, Dow futures (YM=F) have gained 0.1%, and Nasdaq futures (NQ=F) are 0.2% higher an hour before the opening bell in New York.
Mohit Kumar, chief economist Europe at Jefferies, said:
We expect Powell to push back on the aggressive rate cuts priced in.
While the slowdown in inflation would be a welcome, we think it’s too soon for the Fed to declare victory over inflation.
Powell is likely to keep a balanced tone, stressing the data-dependent nature of Fed’s decision-making, and argue that it would be too soon to discuss rate cuts.
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Zara owner boosts outlook amid strong festive sales
A Zara store in Barcelona The owner of Zara posted a slowdown in consumer spending in the third quarter but still raised its profit outlook.
Spanish retail company Inditex reported nine-month net profit of €4.1bn (£3.5bn). It said that Christmas trading had been strong so far with sales up 14% in the six weeks to 11 December.
Victoria Scholar, head of investment at Interactive Investor, said:
Inditex has been successfully navigating the pressures from a weak consumer and sluggish economic backdrop, outperforming rival H&M.
But despite its intelligent pricing and inventory strategy, it is not immune to these headwinds which are starting to show up in terms of weaker revenues.
Shares in Inditex are up around 50% so far this year, with a gain of more than 12% over the past month.
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Skills shortages growing
Ann Swain, Global CEO of APSCo comments:
We’ve known for some time that the UK’s skills shortages were having a growing impact on recruitment and this latest data really does re-enforce this. There may be a slow-down in new jobs at the moment, but that doesn’t mean that the staffing market is grinding to a halt.
In fact, what we are seeing at the moment is a delay in new roles being added while outstanding placements are filled, hence the uptick in permanent placements alongside new vacancy declines.
It’s unlikely that we’ll see a solution to these skills shortages any time soon, so recruitment firms can head into the New Year reassured that demand for the services is still going to remain buoyant.
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Mortgage rates predicted to fall next year
The average one year swap rate has fallen to 5.20% in December, down by 2% from November and the fifth monthly decline seen since hitting an annual high of 6.09% in July.
Five year swap rates are even lower, reaching an average of 4.32% in December, down from 4.48% in November, having also fallen consistently from an annual high of 5.25% in July.
While both still remain higher than at the start of the year, it provides further evidence that mortgage rates could be set to drop.
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Oil prices fall to lowest in five months
Oil prices plunged to their lowest level in five months amid concerns of oversupply and after US inflation came in higher than expected.
The consumer price index, a closely watched inflation gauge, increased 0.1% in November, and was up 3.1% from a year ago.
Traders expect the US will keep dumping every available barrel in the market to try to keep the energy component cheap ahead of the US Presidential elections in 2024.
Another factor weighing on the oil price is news from the COP28 climate summit in Dubai, where nearly 200 countries agreed to a deal that, for the first time, calls on all nations to transition away from fossil fuels.
The West Texas Intermediate (CL=F) was trading at $68 per barrel while Brent (BZ=F) crude slipped to $73.
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Boots owner plans UK listing of pharmacy chain
A Covid test that can provide a result in 12 minutes will be made available at high street pharmacy Boots in selected stores over the next few weeks, London, Britain, 26 October 2020. The nasal swab test, which will cost £120, will be available in more than 50 stores across the UK to anyone who is not showing symptoms. The test, and the device needed to process it, have been approved by authorities in Europe and the US. In trials on more than 500 patients it accurately detected the virus in more than 97% of cases. (Photo by Maciek Musialek/NurPhoto via Getty Images) Walgreens Boots Alliance (WBA), the US owner of Boots is weighing a £7bn ($8.76bn) UK listing of the high street pharmacy chain almost two years after a sale process was shelved.
Boots’ management is said to be pushing Walgreens toward an initial public offering (IPO) which would mark a return of the company to the London Stock Exchange (LSE) after 16 years, according to Bloomberg.
Walgreens is in a cost-cutting push and has brought in new chief executive Tim Wentworth to strengthen the company’s US focus.
Walgreens recently announced it was cutting $1bn of costs from its operations in America. It has also been cutting back the number of stores it has in the UK.
The Boots business has 2,200 stores across the UK which includes pharmacies, health and beauty stores.
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SMEs relying on savings rather than new lending
UK Finance’s latest data shows that £3.5bn was lent to small and medium enterprises (SMEs) in the third quarter of 2023, representing the fifth consecutive quarterly fall.
Meanwhile gross lending is down by just over a fifth when compared to 2022.
Demand uncertainty, higher interest rates, and the impact of lending taken out during the pandemic have all contributed to the weakness in gross lending this year.
Picture3-2 There was a slight decrease in the number of approved loans and overdrafts from Q2, with the trend of more overdraft approvals compared with loans continuing.
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Reeves: Economic growth is going backwards
Labour shadow chancellor Rachel Reeves (PA Wire) Rachel Reeves, Labour’s Shadow chancellor of the exchequer, has warned that economic growth is “going backwards”.
She said:
Rishi Sunak ends the year having failed to deliver on his own promise to grow the economy. Economic growth is going backwards leaving working people worse off.
After thirteen years the Conservatives have failed on the economy and after the chaos of the past few weeks Rishi Sunak is clearly too weak to deliver for Britain.
Under Keir Starmer’s leadership the Labour Party has changed and is now the only party with a long-term plan to grow our economy, cut bills and make working people better off.
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Markets bet interest rates will fall to 4.25% in 2024
Financial markets are now predicting that there will be 95 basis points of cuts by the Bank of England next year, which would bring rates down to 4.25%.
On the back of the news, the pound (GBPUSD=X) has taken a hit in early trading, falling 0.4% against the dollar toward $1.25 and dropping 0.2% against the euro (GBPEUR=X) at €1.1616.
Meanwhile, UK 10-year gilt yields fell to their lowest since 18 May at 3.904%, down 6bps on the day.
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UK economy to escape recession, says KPMG
KPMG chief economist Yael Selfin said this morning’s ONS data shows that the UK economy will “keep its head its above water”.
Weakening economic conditions will remain a feature over the near term, with a large part of the impact from tighter monetary policy still to come.
Around 1.5m fixed-rate mortgages are set to expire next year, which will put pressure on consumer spending.
The manufacturing sector is bearing the brunt from both higher interest rates and the slowdown in trade, with forward-looking indicators pointing to further difficulties for the sector in the months ahead.
Despite activity in the services sector remaining more resilient, output in the hospitality sector has been fragile due to elevated cost pressures and staff constraints, while weak business confidence could see business to business activity remaining sluggish.
Despite the headwinds, we expect the UK economy to escape a recession, with a relatively strong labour market underpinning household incomes and preventing a significant correction in the housing market. The Bank of England will be reluctant to provide support until it sees inflation returning sustainably to target in the medium term but will likely keep interest rates on hold tomorrow.
Watch: How does inflation affect interest rates?
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