Hello, and welcome to the latest Astute Market Overview.

Many key markets sit close to the levels at the start of the month, despite an early September dip followed by a steady recovery. The biggest news centres on monetary policy, with the European Central Bank’s decision on interest rates last week whilst the Federal Reserve and the Bank of England in the US and UK have made their announcements this week.

As investors, we closely monitor the health of global economies to decide how best to position our investments. When economic news breaks, we often see short-term market reactions. Given that we have a long-term outlook, these short-term moves do little more than provide us with opportunities to capitalise on short-term fluctuations when markets are over or underreacting, and we can perhaps take some profits to invest elsewhere when it is underpriced.

That being said, let’s dive into what we have been watching.

The rate of unemployment in the US has been gradually ticking up this year from 3.7% in January to 4.3% in July. However, the latest figures revealed a slight improvement for September, with the rate easing to 4.2% and 142,000 new nonfarm payroll jobs added. Whilst these figures sound promising, there were downward revisions to previous months, with June and July’s new job figures revised down by 86,000 collectively. This suggests the US economy isn’t as strong as initially thought, which triggered a brief market dip.

On Wednesday, the Federal Reserve cut rates by 0.5%. This magnitude of a cut would usually be a drastic measure, however, the Fed reassured investors that this was part of a well-managed approach, not a panic response. The message from Fed Chair, Jay Powell was clear: the timing was right, not too early, not too late. Whilst this 0.5% cut is the beginning of a rate-cutting cycle, with further reduction expected as rates approach a neutral stance, Powell was clear that a bumper half percentage point cut isn’t the new normal, stating “no one should look at today and think this is the new pace.”

The Fed also shared its forecast, suggesting that rates could be cut by a further 0.5% this year, and then an additional 1.00% by the end of 2025 compared to their last projections in June. Of course, as we move further out the predictions become more uncertain, especially with various economic data releases to come and the influence of a new US president.

Overall, despite the highs of inflation in recent years, it seems like a soft landing for the US economy is achievable.

Turning to the UK, the latest Gross Domestic Product (GDP) figures revealed that the UK economy stagnated in July with 0% growth. Meanwhile, Consumer Prices Index (CPI) inflation for August came in at 2.2%, slightly above the Bank of England’s 2% target. This slight uptick from June’s 2% isn’t likely to cause alarm at the Bank of England, as they previously predicted that inflation would peak at around 2.75% by the end of this year before easing off again.

Today (Thursday) the Bank of England met to discuss interest rates. In a much-anticipated move, they voted by 8-1 to hold interest rates steady at 5.00%. We expect that, data allowing, they will cut the base rate in November, and further again into next year.

Though we are focussing on September’s central bank moves in this update, understanding the broader trajectory is essential. Since 2021, stubbornly high inflation has been a key driver of higher interest rate increases in the UK, Eurozone and US, with all regions starting the period with interest rates at or close to record lows. Over the period, we’ve seen complete change to market dynamics, and (of course) domestically, those of us with mortgages or debt have felt the pain acutely!

We’ll see you next time.