September 2023 Investment & Economic Update

The FTSE 100 index of leading UK company shares closed at the end of August at 7,439.13 points, down 260.28 points or 3.38% during the month.

UK Manufacturing Downturn

Despite a bleak outlook for UK manufacturing, the FTSE and European markets experienced a rise at the start of September.

The S&P Global manufacturing PMI revealed a 39-month low in output at 43.0, signalling contraction in the sector. This downturn was attributed to a combination of factors, including rising interest rates, a cost-of-living crisis, and weaker domestic and export conditions.

Concurrently, August data indicated the fastest drop in purchase prices since January 2016 and a continued decline in manufacturing employment for the eleventh consecutive month.

Companies cited reduced new work, falling output volumes, and cost control measures as reasons for the staffing cuts while also noting excess capacity and shrinking backlogs of work.

Stable Eurozone Inflation Leads to ECB's Pause in Rate Hike Cycle

In August, eurozone inflation held steady at 5.3%, prompting European Central Bank President Christine Lagarde to suggest a potential pause in the ongoing cycle of interest rate hikes.

Across the Atlantic, the US Federal Reserve saw its preferred inflation indicator rise in July, partially offsetting the previous month's decline as it aims to steer inflation back to its 2% target.

UK Housing Market Experiences Slowest Growth Since 2009

August saw the weakest UK house price growth since July 2009, with a 5.3% decline from last year's peak, following a 3.8% drop in July, according to Nationwide data.

Accounting for seasonal effects, prices dipped by 0.8% over the month, translating to an annual fall of roughly £14,600 on an average home, now priced at £259,153.

Nationwide's Chief Economist Robert Gardner attributed the softening to increased borrowing costs, which have led to reduced market activity below pre-pandemic levels.

However, Gardner remains optimistic that improving income growth and modestly lower house prices will enhance housing affordability, particularly if mortgage rates stabilise.

UK Economy Surpasses Pre-Pandemic Levels

Newly revised data from the Office for National Statistics (ONS) indicates that the UK economy had already rebounded to pre-pandemic levels by the end of 2021. Contrary to previous estimates, which suggested the economy was 1.2% smaller than 2019 levels, the ONS now states that the economy was actually 0.6% larger.

This revision also adjusts the UK's economic growth for 2021 to 8.5%, up from the earlier estimate of 7.6%.

Chancellor Jeremy Hunt welcomed the news, stating that the faster-than-expected recovery disproves naysayers and highlights the resilience of the British economy. However, he acknowledged that challenges like inflation and cost-of-living pressures remain.

Urgent Need for Increased Private Investment to Achieve UK's Net Zero Goals

To reach its net zero emissions target by 2050, the UK needs to ramp up private investment by two-thirds, according to a joint report by Energy UK and Oxford Economics.

The report emphasises the need for government incentives to stimulate innovation and technological advancements. Researchers outlined various scenarios in their "Path to Prosperity" paper, concluding that the most ambitious approach—"Net Zero Transformation"—would significantly boost the UK economy, potentially increasing GDP by 6.4% or £240 billion by 2050.

The study also warned that the UK is unlikely to meet its climate goals under current policies. Still, it noted that increased investment could lower costs and boost productivity, citing the falling costs of solar and offshore wind energy as examples.

China's Economic Slowdown Amid Property Market Challenges

China's economic growth is decelerating as the government grapples with a downturn in the property market, mainly focusing on issues with significant developer Country Garden.

Unlike Western consumers, who received substantial support during the COVID-19 pandemic, Chinese citizens were largely left to manage independently, and the anticipated post-pandemic spending surge did not materialise. Demand for Chinese exports is also waning as key trading partners face rising living costs.

With 70% of Chinese household wealth invested in real estate, a significant slowdown in this sector is having a ripple effect on the broader economy.

While China has previously navigated economic crises through infrastructure investment and property market stimulation, the current situation raises concerns about the sustainability of such measures.

Swiss Experts Urge Preparedness for Big Bank Failures

In the aftermath of Credit Suisse's collapse, Swiss experts, including bankers and academics, have called on the government to bolster its preparedness for the potential failure of a major bank.

Earlier this year, UBS Group became Switzerland's largest bank after a government-backed takeover of Credit Suisse to avert its complete collapse. The failure of Credit Suisse, once a symbol of Swiss financial stability, caught officials and regulators off guard, despite the bank's history of scandals.

The experts highlighted the need for readiness, particularly as UBS has grown significantly larger, but stopped short of recommending radical reforms.

Mixed Signals in US Labor Market

The US economy outperformed expectations by adding 187,000 jobs in August, according to the Labor Department's recent employment report. However, the unemployment rate ticked up to 3.8%, and wage growth moderated, suggesting a cooling labour market.

These mixed signals could reinforce the belief that the Federal Reserve may hold off on raising interest rates in the near term.

The data for July was also revised downward, showing 157,000 jobs added instead of the initially reported 187,000. Economists had predicted a more modest increase of 170,000 jobs for August, influenced by factors such as a strike among Hollywood actors and the bankruptcy of a major trucking company.

The tendency for August payroll numbers to be revised upwards in subsequent months was also considered in these projections.

Decline in US Commercial Crude Inventories Signals Market Tightening

US commercial crude oil inventories have seen a significant reduction, dropping by 34 million barrels since mid-July. According to the US Energy Information Administration, this decline has been observed in five of the last six weeks.

The drawdown in commercial crude accounts for the entire reduction in total inventories, which have decreased by 19 million barrels since July 14. Meanwhile, product inventories increased by 12 million barrels, and strategic stocks rose by 3 million barrels.

As of August 25, commercial crude stocks were just 1 million barrels above the ten-year seasonal average, narrowing from a surplus of 22 million barrels on July 14. This trend contributes to a sense of market tightening and positively affects spot prices and calendar spreads.

Ofgem Triples Compensation Cap for Storm-Related Power Cuts

To hold energy companies more accountable for service disruptions, UK energy watchdog Ofgem has nearly tripled the maximum compensation for households and businesses affected by power cuts due to storms.

The cap has been raised from £700 to £2,000 following a review of the response to Storm Arwen in November 2021, during which nearly one million homes and businesses experienced power outages.

Ofgem's "tough new rules" aim to ensure better preparedness by distribution network operators responsible for connecting consumers to the electricity grid. The review revealed that 40,000 consumers faced power cuts lasting three days, and in some regions, almost 4,000 people were without power for over a week.

Russia Faces Double-Digit Interest Rates

A recent Reuters poll indicates that Russia will likely sustain double-digit interest rates well into the next year due to accelerating inflation. The central bank recently increased its key rate by 350 basis points to 12% in an emergency meeting, following the rouble hitting a near 17-month low against the dollar.

Despite some recovery, the rouble remains outside the government's preferred range of 80-90 against the dollar.

The currency's depreciation—nearly a quarter in value this year—is exacerbating existing inflationary pressures. These pressures are further fueled by Russia's large budget deficit, a tight labour market, and robust consumer demand.

Voluntary Carbon Markets Contract

For the first time in at least seven years, voluntary carbon markets are contracting, with companies like Nestlé and Gucci reducing their carbon credit purchases. This decline comes amid revelations that several forest protection projects failed to deliver on their promised emissions reductions.

The contraction jeopardises global climate goals and has implications for developing countries that rely on funding from these markets for climate mitigation projects. For example, Kenya aims to become a trading hub for carbon offsets.

Data from BloombergNEF shows a 6% drop in the number of credits companies use in the first half of the year, signalling that demand for carbon credits will decrease further in 2023.

Market data

£1 buys $1.2694 or €1.1674. Gold is $1,955.55 an ounce, and UK natural gas futures are 85.21p/therm, up from 71.51p/therm at the start of August. The UK 10-year gilt yield is 4.364%, down from 4.400% at the start of August.

Kellands will continue to keep you updated on market developments on a regular basis. However, if you have any questions or need some financial advice in the meantime, please do not hesitate to get in touch.

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