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Weekly comment: Stocks retreat on higher-for-longer rate expectations

Date: 27 September 2023

Weekly podcast – Market overview

This week’s host, Investment Manager, Vanessa Eve, discusses the ups and downs of the past week with Head of Fixed Interest Research, Richard Carter and Equity Research Analyst, Ben Barringer. Among the topics discussed – inflation, interest rates and what markets will focus on next.

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Market overview – Alan McIntosh, Chief Investment Strategist

Global stock markets declined last week, with the MSCI All Country World index closing -2.7% to take year-to-date returns to 11.5%. The weakness came about due to growing market expectations of higher-for-longer interest rates, a view bolstered by the latest communication from the US Federal Reserve (Fed).

Central bank decisions dominated the economic calendar last week, headlined by the Fed’s announcement on Wednesday. While rate setters kept the key benchmark rate unchanged in the 5.25%-5.50% target range, the accompanying statement showed policymakers expect one more rate increase this year and a higher level of rates in 2024. A more resilient than expected economy has caused rate setters to project higher rates in the coming months and years via the so-called “dot plot”. 

US stocks marginally underperformed on the week, with broad-based benchmarks returning -2.9% to trim 2023 returns to 13.9%. Technology stocks, which are typically more sensitive to changes in rates, fared worse as benchmarks ended up -3.6%. This dynamic also showed up with growth stocks lagging value. The 10-year Treasury yield rose by 11 basis points on the week, hitting its highest level since 2007 at 4.44%.  

The hawkish update was in contrast from the message coming out of the Bank of Japan (BoJ) following its latest policy decision and the ongoing monetary policy divergence pushed the yen back down near the 150 level against the US dollar. 

BoE pause

In the UK the Bank of England narrowly voted in favour of keeping its key interest rate unchanged, the first pause at a policy decision since December 2021. The move ended a run of 14 consecutive interest rate increases, with a 5-4 split among rate setters in favour of maintaining the base rate at 5.25%.

The decision came the day after the latest inflation data showed an unexpected drop in the UK consumer price index (CPI) to 6.7% in annual terms. Although this level is well above the central bank target of 2%, it marks a third consecutive drop and is the second time in three releases to come in 30 basis points below the consensus forecast. It also signals a significant drop from last year’s peak CPI reading of 11.1%.

The data and subsequent decision to hold rates unchanged caused a notable drop in UK government bond yields as the 10-year gilt yield fell 11 basis points to 4.24%. Sterling also declined against the US dollar, falling to 1.22 – the lowest level in six months. The weaker currency cushioned blue-chips stocks with UK large cap benchmarks ending the week -0.4%, still up 6.2% year-to-date.


Vanessa Eve

Investment Manager, Quilter Cheviot

Richard Carter

Head of Fixed Interest Research

Ben Barringer

Equity Research Analyst

Alan McIntosh

Chief Investment Strategist

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