Market Update

Diminished inflation rates in the US and UK have instilled a renewed sense of confidence among investors. This week witnessed a robust market rally, prompting speculation that central banks may be reaching the upper limit on interest rates.
It appears that the Federal Reserve is now enjoying the best of both worlds! On Thursday, US retail sales revealed that consumers are beginning to feel the impact of increased borrowing costs after indulging in summer spending, with retail sales experiencing a 0.1% dip in October compared to the previous month. While the figure did not plunge to the anticipated 0.3%, it indicates that consumer spending is maintaining a stable position that neither accelerates nor descends to a level detrimental to sustained economic growth—a favorable scenario for the Federal Reserve. This data coincides with a positive Consumer Price Index (CPI) report this month, signaling that the US is making progress toward its 2% inflation target, and statistics showing a promising deceleration in the labor market.
In October, the US Producer Price Index, measuring prices businesses pay to suppliers, also fell by 0.5%, returning price inflation to pre-pandemic levels. Collectively, these indicators suggest that policymakers have succeeded in their tightening efforts, and the possibility of the US approaching or already being at peak interest rates is on the horizon.
In political developments, the US Senate has successfully passed a temporary spending bill, preventing a potential government shutdown. This decisive action, endorsed by President Joe Biden, resolves the third fiscal standoff in Congress this year.
President Biden and Chinese leader Xi Jinping achieved significant progress in their talks in San Francisco this week. Given recent tensions, this face-to-face meeting marks a positive stride forward, with both leaders emphasizing the importance of clear and direct communication moving forward. They agreed to reinstate military-to-military communications, paving the way for improved US-China relations.
Recent data sheds light on the current state of the UK retail sector, revealing a substantial decline in consumer spending. Sales plummeted by 2.7% since October 2022, reaching their lowest point since February 2021 and surpassing the expected 1.5% decline. Factors such as cost of living pressures, reduced footfall, and unfavorable weather conditions have taken a toll on retailers. The decline in retail sales raises concerns about the UK economy, which experienced stagnation between July and September this year. Despite this, the FTSE 100 continued to gain, underscoring the optimism that reduced consumer spending will contribute to lowering inflation. This consumer-driven push for businesses to become more competitive in pricing is likely a positive development.
Chancellor Jeremy Hunt is anticipated to address these economic challenges in the upcoming Autumn Statement on November 22, where he will outline the government's tax and spending plans.
Meanwhile, in the Eurozone, industrial production contracted by 1.1% in September, surpassing previous forecasts of 0.7%. This marks the region's seventh consecutive month in production contraction. Although growth is projected to rebound in 2024, as highlighted by European Central Bank President Christine Lagarde in a recent address on interest rates, the data suggests the possibility of slower GDP growth in Q4.