Central Banks in US, England and Japan Hold Rates, US Government Shutdown Looms
Last Week Review
Global equities declined 2.7% across major regions, led by a 3% decline in U.S. stocks. Higher Treasury yields weighed on U.S. equities, as the two-year yield rose 0.08% and the 10-year yield increased 0.10%.
Federal Reserve Signals Higher Rates Long-Term
The Federal Reserve held its policy rate last week, but in the ensuing press conference and updated Summary of Economic Projections we believe the Fed signaled higher rates for longer. Versus the June economic projections, the Fed upwardly revised its 2023 real growth forecast to 2.1% from 1.0% and its 2024 forecast to 1.5% from 1.1%. The Fed reduced its 2023 inflation projection down 0.2% to 3.7% while leaving 2024 at 2.6%. The Fed kept its expectation for another rate hike this year while removing two previously projected cuts from 2024. Treasury yields moved higher and investor expectations for the future policy rate rose, though three cuts are still priced in for 2024 based on futures trading.
Bank of England Also Holds Rate
In a close vote, the Bank of England kept its policy rate unchanged at 5.25%. We think the market expects that the central bank is done with rate hikes through this cycle. Near-term cuts remain unlikely as we believe the rate path highly depends on the condition of the economy. Before the decision, the U.K. Consumer Price Index inflation report meaningfully surprised to the downside, causing investors to reduce their previously high expectations of a rate hike last week, based on futures trading.
Bank of Japan Leaves Policy Unchanged
The Bank of Japan left its rate and yield curve control policy unchanged. Governor Kazuo Ueda pushed against speculation of a near-term surprise end to the bank’s negative interest rate policy. Japan’s core Consumer Price Index remained elevated last week at 4.3% year-over-year, but wage growth has been subdued. The yen further weakened against the U.S. dollar last week — nearing the 30-year low reached about a year ago.
U.S. Services Expansion Slows, Europe Remains Weak
The U.S. Flash Purchasing Managers’ Index showed expanding but less robust activity overall with slower growth in services offsetting manufacturing improvement. The index in Europe showed surprise improvement with services, but overall activity remains weak.
This Week Preview
Fed’s Preferred Core Inflation Gauge Expected to Decelerate
The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index, is scheduled to be released on Friday. It’s expected increase 3.6% year-over-year in August from 3.3% in July, but the core index is expected to fall to 3.9% from 4.2%. Personal income and spending releases will also be important indicators alongside the inflation release this week.
U.S. Autoworker Strike Continues
We expect investors to monitor the ongoing strike by the United Auto Workers against Ford (F), General Motors (GM) and Stellantis (STLA). The targeted strike broadened to more General Motors and Stellantis plants last week after negotiations failed to make notable progress. The impact of the strike may be limited in the near-term, though that could change if the strike lasts for an extended amount of time.
Investors Assess Shutdown Risks
The U.S. government faces a shutdown on Saturday, when funding ends, without a new spending agreement. Congress can either agree on legislation or buy more time with a resolution to keep funding at current levels, but neither appear likely. Historically, financial markets tend to be mostly unperturbed by shutdowns, though they can impact some sectors. A shutdown could disrupt the release of key government economic data.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of September 24, 2023.
See our latest insights and research.
IMPORTANT INFORMATION
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. (NTI) or its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe (NTI) or its affiliates’ efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by (NTI) or its affiliates. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2a of the Form ADV or consult an NTI representative.
Forward-looking statements and assumptions are (NTI) or its affiliates’ current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over-compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of (NTI) or its affiliates.
This information is intended for purposes of NTI and/or its affiliates marketing as providers of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NTI and/or its affiliates are not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. NTI and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing, and other services rendered to various proprietary and third-party investment products and firms that may be the subject of or become associated with the services described herein.
Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. P-092523–3130229–092424