Market Report - 13/12/2023
UK GDP disappoints ; Market awaits FED rate decision
The UK economy shrank by 0.3% in October 2023 on a monthly basis, as reported by the Office for National Statistics. The report showed that the UK’s services, production and construction sectors all shrank.
The 0.3% drop was worse than expected (a flatline 0% change was forecast by economists) after a surprise jump of 0.2% in September. The ONS revealed that services output fell by 0.2% in October, mainly driven by a fall in information and communication. Production output fell by 0.8% with declines in manufacturing. The construction sector fell 0.5% after seeing 0.4% growth in September.
The Pound reacted almost instantly, dropping down to 1.2516 against the US Dollar and 1.1605 versus the Euro. Some economists have suggested that the chances of a rate cut from the Bank of England have now increased following more signs of a weakening economy in the UK, though there aren’t more shocks expected tomorrow when the MPC vote.
With the latest fall in GDP figures, it begins to raise fears that the economy could shrink further in the final three months of the year, that would put Britain on the brink of a much anticipated and feared recession.
In the US, the Federal Reserve and FOMC will vote on whether to cut interest rates this evening (7pm UK time). Investors have been seemingly anticipating action since a top Fed official hinted last month that rate cuts were at least possible as early as March. It’s likely that in tonights meeting the Fed will provide some hints about the extent of rate cuts next year. In the meantime, it seems set to leave its benchmark rate unchanged for the third straight time.
The Fed's 19-member policy committee will also issue its quarterly economic projections, which includes estimates of unemployment, inflation and growth over the next three years. It is likely that some of the forecasts will point to rate cuts during 2024, with most economists expecting Fed officials to project two, or possibly three, reductions - Whilst some of the more bullish economists even suggesting four cuts.
If Fed leaves rates unchanged Wednesday, as expected, it would be the third straight time it has done so. This could continue to fuel the idea that rate hikes are over after hiking rates 11 times, starting back March 2022, to about 5.4%, the highest level in 22 years.