Market Update – 18th September 2024.

18th September 2024

The UK’s headline annual Consumer Price Index (CPI) remained unchanged in August, holding steady at 2.2%, with the rise in air fares offset by lower fuel prices. The figure came in line with expectations and continues to hover closely to the Bank of England’s 2% target. The breakdown from the Office for National Statistics revealed that while consumers are retreating from splurging on bigger ticket items, the rise in air fares (a growth of 11.9% vs -10.4% in July) perhaps suggests that holidays are still on the public’s priority list. In what continues to be a headache for the Bank of England in their fight against inflation, services inflation also ticked up to 5.6% in August from 5.2% in July. The latter will be a hot talking point when policymakers meet this week to decide on interest rates, although the market is currently pricing in no change.

On Tuesday, US retail sales for the month of August came in unexpectedly higher. The US Census Bureau reported that sales rose by 0.1%, exceeding expectations of a 0.2% decline. Excluding vehicles and fuel sales, ‘core’ retail sales rose by 0.2% in August, illustrating that the American consumer continues to possess a level of spending resilience despite the prevalence of high interest rates.

But will interest rates remain as high after today? The market thinks not, and all eyes today are turned to the latest Federal Reserve interest rate decision, due  at 7pm UK time. Traders are not only keen to hear whether policymakers make the decision to reduce interest rates, but also any commentary that arises from the meeting, hoping to catch clues about the future path the central bank will take concerning monetary policy (this is despite policymakers consistently maintaining their data-driven stance).

The Fed has had plenty of economic data to chew on prior to tonight’s announcement. The US’ unemployment rate currently stands at 4.2% which, while relatively low, has ticked up from when the Fed paused rates back in 2023 and sits alongside a slowing of monthly job growth and a higher-than-expected core inflation reading of 0.3% in August. Coupled with the uptick in retail sales, this mixed-bag of economic indicators have traders debating whether we will see a quarter percentage point cut, or a half. We know that the market often runs away with thoughts of a rate cutting or hiking cycle following just one move from the Fed. However, we must always keep in mind that the Fed base their decisions carefully on observed patterns of economic data.

Still to come this week we have the Bank of England’s interest rate decision, UK retail sales Japanese CPI, the Bank of Japan’s interest rate decision.

Nicola Tune, Portfolio Specialist