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WeekWatch
Stock Take
While the UK government contemplated disappointing productivity data, the US saw another drop in interest rates as the Federal Reserve voted to cut rates by 0.25%. The Federal Open Market Committee’s (FOMC) decision was not unanimous. One member voted for a 0.5% cut, while another voted for no cut at all.
The decision was widely expected and marks the second month in a row the Fed has cut rates. Although inflationary pressures remain, a slowdown in the job market prompted this latest move.
As the move had been anticipated, it was Fed chair Jerome Powell’s accompanying comments that investors paid more attention to. The federal government is in the middle of a near six-week shutdown. This means the Fed does not have access to the flow of economic data it needs to keep tabs on the nation’s economic health.
Powell said the central bank was effectively “flying blind” on key data points.
Without the full picture, Powell suggested the Fed was likely to move slower on making future decisions on rate cuts. “What do you do if you're driving in the fog? You slow down,” he said. When talking about what this meant specifically for next month, he said a rate cut in December was “not to be seen as a foregone conclusion - in fact, far from it.”
As a result, expectations of another interest rate cut this year narrowed.
The rise (and rise) of tech stocks
Tech stocks continued to push higher last week. Apple joined Microsoft and Nvidia in the $4 trillion club. However, this news was outshone by Nvidia’s market cap reaching $5 trillion for the first time. At such a high value, some have begun to question whether Nvidia is approaching bubble territory.
Carlota Estragues Lopez, Equity Strategist at SJP, said: "On one hand, Nvidia's elevated valuations seem justified by strong realised earnings growth. But on the other hand, the significant investment and energy for data centres required to keep up with high demand means that there is downside risk and puts into question the sustainability of this growth."
Carlota continues: "The question is whether Nvidia is part of a long-lasting structural shift towards a new technology and how reliably can they keep beating earnings expectations to live up to the optimism that is priced in to the market."
Many other large tech companies posted strong third quarter results, including Amazon, Alphabet, Microsoft and Meta. In another sign that the AI boom continues, Reuters reported OpenAI was laying the groundwork for a trillion-dollar listing.
There was a sting in the tail for some of these companies over concerns about the level of spending needed to sustain the AI revolution. For example, OpenAI is on course to lose billions of dollars this year. Meanwhile, Microsoft’s share price fell despite growing revenue and profits – this reflected investor concerns about the level of AI spend at the company.
European strength
For the eurozone, real GDP increased 0.2% over the third quarter, above the 0.1% recorded in the previous quarters. This suggested the eurozone was performing better than many analysts had expected. Unemployment remained level compared to the prior month.
On Friday, the European Central Bank voted to keep interest rates level, at 2.0%, in line with expectations.
UK storms
There was less good news in the UK, where embattled Chancellor Rachel Reeves is facing tough decisions ahead of the Budget later this month.
Her job will not have been made easier by a fresh productivity downgrade from the Office for Budget Responsibility (OBR) last week. The 0.3% reduction to forecasts was larger than expected and means she will have to find even more money as she finalises her plans for the Budget on 26 November.
Sandwiched between the OBR report and the Budget, the Bank of England (BoE) is due to meet to discuss interest rates this Thursday. The BoE is widely expected to keep rates as they are this month, despite increasing calls for a reduction. Whatever they do, markets will be paying close attention to what BoE Governor Andrew Bailey says following the announcement. Investors will be looking for any hints around whether more rate cuts on the way this year.
This uncertainty did not stop British equities rising, however. There are a few factors driving this, including than anticipated interest rate cut before the end of the year.
Carlota added: “The UK equity rally has been driven in part by optimism surrounding interest rate cuts and in part by dollar weakness. It is very hard to tell whether the BoE's rate cut will have any impact on the November budget."
The week ended on another sour note, as the Telegraph reported on Sunday that the UK’s national debt grew at the fastest rate of any advanced economy between 2005 and 2025. The rising debt pile will be adding to Reeves’ headache, as the cost of servicing it continues to mount.
Wealth Check
Having conversations about money can help people make less risky decisions now and in the future.
That’s the key message of this week’s Talk Money Week, run by the Money and Pensions Service (MaPS), a UK public body.
According to MaPS, which hopes to encourage people to open up about their finances, there are many benefits of talking about money. As well as making better decisions, conversations can help reduce stress levels and even lead to people developing stronger relationships.
With UK families set to pass on trillions of pounds over the next three decades – dubbed the great wealth transfer – starting a financial conversation is only likely to grow in importance.
While much will change over the coming years – and indeed in the short term with the Autumn Budget ahead – thinking ahead to the future while having frank financial conversations will likely reap benefits for many people. Certainly, it could help to smooth the transfer of wealth across families.
With many people reluctant to talk openly about money, and fearful of conflict, it could prove useful to involve a close friend or a trusted financial adviser to help in ensuring productive financial discussions.
In The Picture
Japan is often brought up as an example of even high national debt/GDP ratios. However, most of this debt is held domestically and so is less sensitive to , and Japanese interest rates are much lower than those in the US.
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