Franklin Templeton’s Zahn: BoE could cut rates fairly soon
Franklin Templeton’s head of sustainability and European fixed income, David Zahn, argues that the Bank of England should be able to cut interest rates in the next few months.
Zahn told Reuters:
“The UK economy has continued to disappoint, inflation is coming down quickly and the economy is more responsive to rate hikes, and rate cuts, than Europe or the U.S.”
“Therefore the central bank should be able to cut rates fairly soon, I wouldn’t be shocked if they cut in the next 2-3 months.”
The money markets currently predict the first rate cut will come by June this year.
The Bank has left interest rates on hold at 5.25% since last summer. As flagged at 10.36am, the markets now only expect three cuts this year – not the six that were priced in at the end of 2023.
That change has come amid a wider market repricing, after stronger-than-expected economic data out of America has undermined hopes that the US Federal Reserve would cut rates soon.
As flagged in the intro, two Bank of England policymakers wanted to raise UK interest rates last week.
One, Jonathan Haskel, has said that he wants to see more signs that UK inflation is persistently falling to the Bank’s 2% target before changing his vote.
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Closing post
Time to wrap up.
The Bank of England should be able to cut interest rates “fairly soon”, argues Franklin Templeton’s head of sustainability and European fixed income, David Zahn.
Zahn told Reuters:
The UK economy has continued to disappoint, inflation is coming down quickly and the economy is more responsive to rate hikes, and rate cuts, than Europe or the U.S.”
“Therefore the central bank should be able to cut rates fairly soon, I wouldn’t be shocked if they cut in the next 2-3 months.”
One of the Bank’s hawkish policymakers, Jonathan Haskel, has revealed that his vote to raise interest rates was “finely balanced” (he was outvoted).
Haskel wants more proof that inflation pressures are easing, saying:
“The signs that we’ve seen thus far are encouraging. I don’t think we’ve seen quite enough signs yet.
City traders now expect just three rate cuts in 2024, half as many as back in December.
In the financial markets, Japan’s Nikkei hit a 34-year peak…
..while the US S&P 500 has hit a new alltime high….
..and cocoa prices are at a record high, which will push up chocolate prices.
Saturday is Chinese New Year, and investors will be hoping that the Dragon brings them more luck than the Rabbit.
China’s Shanghai Composite Index finished the Year of the Rabbit with a 12% loss, as shares were hit by worries over China’s economic slowdown, and the crisis in its property sector.
Hong Kong’s Hang Seng index had a worse year, losing almost 29% during the Year of the Rabbit.
Chinese equities underperformed global stock markets in 2023, so shareholders will be hoping for a better 2024 – especially if Beijing rolls out new stimulus measures to help the economy.
Dzmitry Lipski, head of funds research at interactive investor, says:
While there are short-term challenges such as property and geopolitical risk – the threat of conflict with Taiwan is a concern right now – improving fundamentals, strong consumer and technological advancements will be key drivers of the market.
“And as China is increasingly recognised as being a major driver of global growth, investors should consider having exposure to China when building a balanced portfolio. China currently represents nearly 18% of world GDP but less than 3% of world market capitalization, having previously comprised over 5% in late 2020.
“The broad derating of Chinese companies over the past two years means that valuations look attractive, both when compared to historic averages and versus other world indices. Valuations are supported by strong MSIC China consensus earnings estimates of more than 14%.
“For these reasons, the recovery in Chinese equities should continue considering depressed/compelling valuations versus history and other developed markets combined with institutional holdings the lowest in five years, the risk/reward ratio for Chinese equities is favourable.
The US stock market has hit a new record high today, as investors continue to hope for cuts in interest rates.
A day after hitting the 5,000 point mark for the first time, the S&P 500 index has climbed by 0.25% to 5,010.
The news that US consumer prices rose less than initially estimated in December (see earlier post) supported hopes that the Federal Reserve will lower interest rates this year.
Shares in pharmaceuticals group Moderna have dropped by over 5% today, which is being attribued to a study showing the efficacy of its experimental respiratory syncytial virus (RSV) vaccine falls off over time.
The data shows a vaccine efficacy of about 63% after 8.6 months, from 84% at 3.3 months, a faster drop than some rivals (more details here).
There’s been a tiny tweak to the latest US inflation data.
US consumer prices rose by 0.2% in December instead of 0.3% as reported last month, the latest annual revisions of the CPI data show. But that improvement’s been balanced out by a tweak to November’s data – showing CPI increasing 0.2% rather than 0.1% as previously estimated.
Luxury goods maker Hermès has proved immune to the cost of living squeeze, thanks to strong demand for its handbags and fashion offerings.
Hermès has reported a 16% jump in revenues in 2023, with double-digit sales growth of 20% or more in Asia, America and Europe.
Sales of leather goods – such as handbags costing thousands of pounds – were up 17%, while sales in the the ready-to-wear clothes and accessories sector were up 28%.
Axel Dumas, executive chairman of Hermès, said:
“In 2023, Hermès has once again cultivated its singularity and achieved an outstanding performance in all métiers and across all regions against a high base. These solid results reflect the strong desirability of our collections and the commitment and talent of the house’s women and men. I thank them all warmly.
Worries about economic activity, and a stronger dollar, have both knocked the copper price this week.
London-traded copper is on track for its biggest weekly loss since last September, having lost around 3% since Monday morning.
Troubles in the Chinese property sector have hit demand for copper, with China’s drop into deeper deflation suggesting weaker economic demand.
Judge approves settlement in Woodford fund saga
The long-running saga over the settlement scheme for investors in Neil Woodford’s failed fund has finally reached a conclusion.
A judge has approved a scheme that will return £230m to investors in the fund, after they “voted overwhelmingly” in support of the plan.
The Financial Conduct Authority says:
We are pleased that the Court has decided to approve the scheme. We understand that LFS [Link Fund Solutions] expect to start making payments to scheme creditors as soon as possible, if there is no appeal of the Judge’s decision.
Investors voted overwhelmingly in support of the scheme. The small minority have now had their representations fully considered by a judge, who did not agree with their arguments.
Some investors and law firms had argued that £1bn should have been paid to Woodford investors.
The FCA had previously ruled that the Fund’s administrator, Link Fund Solutions, had made “critical mistakes and errors” managing Woodford equity investment fund, particularly in ensuring it was able to easily repay customers who might want to withdraw their investments.
Link was responsible for monitoring and supervising the investments executed by Woodford before the fund failed in October 2019, leaving hundreds of thousands of pensioners and small investors nursing big losses.
Sarah Butler
Workers at Asda’s Gosport store in Hampshire walked out on strike for 48 hours on Thursday night in what’s thought to be the first ever industrial action at one of the group’s supermarkets.
The GMB union said workers had voted to strike after rejecting a company offer relating to wage errors and health and safety concerns . Asda has said the majority of staff at the site will continue as normal.
Franklin Templeton’s Zahn: BoE could cut rates fairly soon
Franklin Templeton’s head of sustainability and European fixed income, David Zahn, argues that the Bank of England should be able to cut interest rates in the next few months.
Zahn told Reuters:
“The UK economy has continued to disappoint, inflation is coming down quickly and the economy is more responsive to rate hikes, and rate cuts, than Europe or the U.S.”
“Therefore the central bank should be able to cut rates fairly soon, I wouldn’t be shocked if they cut in the next 2-3 months.”
The money markets currently predict the first rate cut will come by June this year.
The Bank has left interest rates on hold at 5.25% since last summer. As flagged at 10.36am, the markets now only expect three cuts this year – not the six that were priced in at the end of 2023.
That change has come amid a wider market repricing, after stronger-than-expected economic data out of America has undermined hopes that the US Federal Reserve would cut rates soon.
As flagged in the intro, two Bank of England policymakers wanted to raise UK interest rates last week.
One, Jonathan Haskel, has said that he wants to see more signs that UK inflation is persistently falling to the Bank’s 2% target before changing his vote.
Just three rate cuts expected in 2024
It’s notable that the City has dialled back its expectations for the number of UK interest rate cuts this year, even as the Bank of England has indicated that rates have peaked.
The money markets now indicate UK rates will be cut three times this year, from 5.25% to 4.5% by the end of 2024.
At the end of last year, some analysts thought we’d see six quarter-point rate cuts, bringing Bank Rate down to 3.75%.
Last week, the BoE said there had been “good news” on inflation, but it wants more confidence that price rises will slow.
Last Friday, the City expected four cuts this year, bringing Bank Rate down to 4.25%. But the money markets have adjusted this week.
