Commentary by Felix Wigdahl – Investment Analyst at Thornbridge Investment Management

The interest rate narrative was again in focus in September. The cutting cycle officially started for the US, with the Federal Reserve cutting the base rate by 50bps, bringing it to a range of 4.75%-5%. This monetary easing was implemented due to weak labour market data and concerns for the future of economic growth, indicating that the Fed was willing to support the labour market whilst also alleviating recessionary fears. Later in the month, the PCE, the Feds preferred measure of inflation increased by 2.2% YoY, coming ever closer to the Feds 2% target.

Prior to the Fed announcement, the ECB opted to cut their rates to 3.5% in response to lower inflation and weaker economic growth. Their decision was unanimous and there are now indications that a further rate cut could follow in October as they look to bolster consumer demand. The Bank of England kept rates unchanged.

The previously unloved Chinese markets gained attention towards the end of September when the People’s Bank of China unveiled a new fiscal and monetary package to boost the economy. The measures included a reduction in short-term lending rates for banks, lower mortgage rates, new bond issuance and a pledge to further support the struggling real estate sector. This news caused Chinese equity markets to rally, with the CSI 300 Index returning over 20% during the month. This intervention may have set a floor for the index, limiting downside risk to the level at the time of the intervention, while offering upside potential, especially if the central bank steps in again if conditions worsen.

The US yield curve uninverted during the month following the Feds rate announcement. Bond investors have been able to slowly start seeing more gains as yields decline and prices for existing bonds rise. Unfortunately, the UK bond market has not seen such strong gains due to a less certain easing cycle. On the credit side, spreads for both investment-grade and high-yield bonds narrowed, allowing investors to realise some gains.

Equity markets elsewhere enjoyed gains almost across the board, with the S&P 500 notably reaching all-time highs. The S&P ended the month up 2.02%, with the tech heavy Nasdaq following suit with returns of 2.48%. US companies will enjoy the interest rate easing as debt becomes cheaper to finance, allowing future growth expansions. The FTSE 100 fell 1.66% during September, perhaps owing to the BOE’s decision to keep UK rates constant. 

Author: Felix Wigdahl

Felix is a member of the investment funds team and is involved in portfolio construction, investment committees, trade execution and monitoring.  

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Author: Thornbridge