Market Update – September 2023

The Bank of England held the UK interest rate at 5.25% at the September meeting of the Monetary Policy Committee (MPC). This ended the run of fourteen consecutive rate increases that began in December 2021.

The Bank expects UK inflation “to fall significantly further” in the short term. Consumer Price Inflation (CPI) for August edged slightly lower to 6.7%, well below the recent peak of 11.1% in October 2022, but still well above the Bank’s target of 2%.

The FTSE100 Index fell by 3.4% during August, while the FTSE250 Index declined by 2.8%. Deteriorating news about China’s economy compounded UK investors’ existing concerns over inflation, interest rates, and the outlook for the domestic economy.

In the US, the Federal Reserve (Fed) also left its key rate unchanged in September, at a range of 5.25% to 5.5%. Chairman of the Fed, Jerome Powell, confirmed “it’s more likely than not that it will be appropriate for us to raise rates one more time in the two remaining meetings this year”.

The August CPI figure for the US was 3.7%, well below the recent peak of 9.1% in June 2022, but a further increase from the July figure of 3.2%. The Dow Jones Industrial Average Index fell by 2.4% during August.

Interest rates in the eurozone were also raised earlier this month, from 3.75% to 4%. The European Central Bank (ECB) warned that inflation is expected to “remain too high for too long”. The eurozone August inflation rate fell slightly to 5.2%, less than half of its recent peak of 10.6% in October 2022.

China tipped into deflationary territory during July as its rate of CPI fell by 0.3% year on year. Retail sales growth slowed during July, and exports dropped by 14.5% year on year, while imports fell by 12.4%. The Shanghai Composite Index dropped by 5.2% over the month.

One of China’s largest property developers, Country Garden, has become the latest real estate giant to warn that it could default on its debts. The industry was rocked when new rules to control the amount of money that big real estate firms could borrow were introduced in 2020. Another property giant, Evergrande, has been working to renegotiate agreements with creditors following its collapse in December 2021, which triggered a wave of defaults in China’s real estate market.

China’s property industry has been an important engine of economic growth over the years and accounts for as much as 30% of the country’s GDP. In the mid-90s, a series of reforms allowed urban residents to buy their previously government-owned homes at very reasonable prices, and property now accounts for around 60% of Chinese household assets.

The Chinese property sector represents more than half of global new home sales and home building, and is the largest asset class in the world, with an estimated market value of around $62 trillion. Investors see the revival of the property sector as crucial to the recovery of the world’s second largest economy, following three years of self-imposed pandemic isolation.

Closer to home, official figures from NISRA (the Northern Ireland Statistics and Research Agency) showed that Northern Ireland’s services sector contracted in the second quarter of this year. The slowdown was attributed to the hospitality sector, with retails sales increasing slightly and business services, which includes law, accountancy and management consultancy, continuing to grow strongly. The manufacturing sector also picked up in the second quarter, in particular engineering.

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