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Market commentary

The future is always unpredictable. Widespread economic forecasts that the huge increase in interest rates we have seen in the main developed countries would lead to a recession have not as yet materialised.

6th October 2023

As we approach winter again, oil prices have risen by almost a third since the middle of the year, caused in part by a reduction in output from oil producing countries. Bond yields have also resumed their rise, as economies have proved more resilient and inflation more stubborn than central banks expected. At the same time, US equities lost ground with the index down almost 5% in September.

Global markets are complex. During the pandemic consumers bought ‘stuff’ while we were locked down in our homes, however since the reopening of society, there has been a rebound with people buying experiences and services instead. Conversely some companies benefited during lockdown while others struggled. We will have to wait and see what the longer-term impact of future interest rates potentially being higher than they have for the last 15 years will have for individuals and for the global economy.


Inflation dipped from 6.8% year-on-year in July to 6.7% in August which was a surprise fall against expectations of a rise to 7.0%. Given the sharp increase in petrol prices over the course of the month, it was unsurprising that the headline measure was boosted by transport prices, which includes vehicle fuels. However, this was more than offset by further declines in food price inflation and a fall in restaurant and hotel prices.

The data was sufficient to encourage the Bank of England to keep the base rate on hold at 5.25% at their meeting in September. However, UK Inflation remains amongst the highest among developed nations.


Bank base rates in the eurozone were increased by the European Central Bank to 4% in September, a record high since the eurozone began and surpassing the 3.75% level last seen in late 2000.

August inflation figures were released showing inflation had fallen only marginally from 5.3% to 5.2% which may have influenced the interest rate rise. However, figures released for September showed inflation down to 4.3% in a sign that the overall increase in rates is working to bring inflation down.


In September, as was expected, the US central bank held rates at a range of 5.25-5.50%. However, this decision was accompanied by a firm ‘higher for longer’ message, leading to bond yields, especially at longer durations, rising.

The US economy has been remarkably resilient over the past few months, particularly the consumer economy and it is looking unlikely there will be a recession in the short term.

There are downside risks to the economy arising from a potential Government shutdown. At the end of September hard-line Republicans unhappy with the spending deal struck by House Speaker McCarthy and President Biden during the debt ceiling negotiations refused to pass the US spending bills without seeing large cuts to expenditure. Just before the deadline on Saturday 30 September, a deal was agreed which will keep the Government operating until mid-November. This is a stop-gap measure which allows both sides to continue negotiations without the economic impact of a temporary shutdown.

Emerging markets

All eyes continue to be on China. We have spoken before about the ongoing restructuring of the highly indebted real estate sector. The latest news there is that real estate giant Evergrande has been unable to sell certain assets or issue new debt as part of its restructuring plan, sending the shares down 20% on the news (although they already trade at a fraction of their pre-Covid levels, because the outstanding debts overwhelm the small equity value that might be left).

To date, widely expected stimulus measures by the Chinese Government remain piecemeal by nature rather than being bigger and more meaningful. This means a slow recovery.

Defensive assets

In the short term, the resumption of bond yields increasing has been negative for defensive assets, but attention may well soon turn to when central banks will start to ease rates. Markets are certainly pricing in that interest rates may start to come down again in most developed countries in 2024, even after the higher rates for longer statements from the US Federal Reserve.

Central banks are being ‘data driven’ and watching closely what impact higher rates are having on their economy to decide future policy. Unless there is a severe shock to economies it is expected interest rate cuts will be at a much more measured pace.

While interest rates stay high for longer, the funds you invest into will pay higher yields. Both the Dimensional Global Short Dated Bond and the new Vanguard fund we introduced into portfolios have yields to maturity of over 5% and the inflation linked bond funds we have will continue to benefit from higher inflation.

Economic data can change quickly and if the economic picture should worsen and interest rates are cut more quickly than expected this can cause an increase in the capital value of bonds which you will receive in your portfolio.

Please speak to your financial planner if you want to discuss your portfolio.