Amidst the hubbub of Ex-President Donald Trump becoming President Elect Donald Trump, the Bank of England announced on Thursday 7th November that they were cutting interest rates by 25 basis points. This is the second time this year that the MPC (Monetary Policy Committee) has cut interest rates, this time voting by a majority of eight to one. This cut came as data released showed inflation down to 1.7% in September, down from 2.2% in August. However, policymakers were quick to point out that the recent budget presented by Chancellor Reeves, which contained £70 Billion of extra spending (backed by higher taxes), would add 0.5% to headline inflation and 0.75% to GDP (Gross Domestic Product).
The single dissenting voice in the MPC was external economist Catherine Mann who voted for interest rates to be held steady at 5%. This was due to the Bank of England announcing that the increase in the national wage and National Insurance Contributions (NICs) could possibly be responsible for adding inflationary pressure in the form of higher prices and and reduced wages. Policymakers further implied that due to the budget, the cost of borrowing will decrease at a slower rate in 2025.
[A] gradual approach to cutting borrowing costs [is] required
Andrew Bailey, Governor of the Bank of England
Some experts have predicted that the slower pace in cutting interest rates will have a negative impact on many households. The Governor of the Bank of England, Andrew Bailey, in a separate statement cautioned that whilst borrowing cost would still be coming down in the future, the markets should not expect any rapidity in this area. Indeed, with President Elect Trump, who will be firmly ensconced in the White House next January, the Governor went on to say a “gradual approach to cutting borrowing costs was required” as US policies could also encourage inflationary pressure in the world economy.
Analysts now advise that that interest rates will probably not fall below 4% in 2025 .Some experts suggest that borrowers should lock in borrowing costs now with interest rates staying higher for longer, with the added influence of American policy having a negative impact on UK inflation. The Bank of England further announced that they expect inflation to be around 2.5% by close of business December 2024, up from the 1.7% figure in September, adding their oft repeated message that monetary policy would have to stay “restrictive for sufficiently long” to return inflation to 2% on a sustained basis.
There are many positives in the crypto world at the moment: with Bitcoin recently attaining an all-time high, renewed inflows into Exchange Traded Funds (ETFs) and with market sentiment betting on an ex-president Donald Trump win, especially as he is a crypto convert. Many experts confirm that recently the market has been dominated by the performance of Bitcoin, however, underneath all the confidence, there is a growing concern that some of the once perceived “hot assets” are struggling.
There appears to be a split in the cryptocurrency performances with Bitcoin and Solana up circa 64% since the start of the year and Elon Musk and Memecoin are up a staggering 80%. However, the so-called altcoins* of Algorand, Polkadot, and Polygon all took a beating. Venture Capital deals have yet to recover from the crash that came after the 2021 bull market, with data showing investment in digital-asset start-ups falling by 20% in the third quarter on a quarter-on-quarter basis.
*Altcoins – These are alternative cryptocurrency to Bitcoin; they are rapidly multiplying and can be subject to extreme volatility.
Elsewhere, crypto exchange Coinbase Inc announced earnings estimates were missed and their rival crypto exchange Kraken has been rumoured to cut the workforce by 15%. DYdX trading announced recently that they will be making redundant in excess of 33% of their workforce and Consensys, whose main business is providing software for the Ethereum Network, has announced they are trimming their workforce by circa 20%.
Consensys and many other associated crypto companies are attributing their current woes to a certain extent to the SEC (US Securities and Exchange Commission) and their lack of clarity surrounding regulations. Interestingly, if elected, Ex-President Donald Trump has announced he will fire the Chairman of the SEC Gary Gensler. One expert recently announced that due to regulatory uncertainty, many large US operators and centralised exchanges will potentially incur higher costs.
Furthermore, one expert advised that some of the digital-asset companies, due to their technologies, are struggling to generate revenues, which added to the perceived increase in costs may well be behind the recent announcements of workforce cuts. It has also been noted that many blockchains which were being looked upon as alternatives to Bitcoin have gone into decline, again possible due to crypto start-ups not receiving the required investment funds.
There appears to be a disconnect in demand and supply due to the bifurcation or fragmentation in the crypto arena. However, on the positive side, Bitcoin, the on-going poster boy for cryptocurrencies and the crypto market in general, is going from strength to strength. Furthermore, the introduction of Bitcoin-backed Exchange Traded Funds in January 2024 has paved the way for adoption by wall street and a massive inflow of funds. An example of this is BlackRock Inc’s iShares Bitcoin Trust which, on Wednesday 30th November, saw a record inflow for a single day of USD872 Million. Donald Trump has vowed to turn the United States into the crypto capital of the world, and whilst this is good news for the crypto market, the industry will have to get its underbelly in order.
Traders across the globe are reviewing the path of US interest rates as the possibility of a Trump presidency becomes a reality, which could lead to reflationary policies. October has seen 10 year treasury yields increasing by 0.4% points to 4.2% due to an emerging Trump Trade* and data showing strong economic figures. Since the last rate cut in September, two-year treasury yields also increased by 34 basis points. The Federal Reserve has also recently adopted a more cautious tone over the pace of future interest cuts, especially as data released is showing a more robust US economy.
*Trump Trade – The financial markets regard the Trump Trade as a view that less regulation, lower taxes, less immigration, and higher tariffs could benefit certain sectors and industries, and have important implications for inflation and bond yields.
Experts advise that investors and traders alike are scaling back bets on another interest cut by the FOMC (Federal Open Market Committee) at their next meeting on 6th/7th November 2024. Originally market sentiment was in favour of yet another interest rate cut since the Federal Reserve cut interest rates by 0.5% on 18th September 2024 and were indicating that further interest rate cuts were in the pipeline. However, the recent economic data indicates that there is no need for another interest rate cut of 0.5%, whilst at the same time analysts advise that traders have locked in volatility ahead of the US election and the UK budget.
The big sell-off in US treasury bills has affected both the commodity markets and the currency markets, with the USD Dollar having its best month for 2 years up over 3% against a basket of currencies. In the swaps market, trading experts suggest that there is an increased possibility of the Federal Reserve holding interest rates steady at one of their two upcoming meetings. Furthermore, as the presidential race is now neck and neck, with some polls suggesting a small lead for Trump, this has increased the possibility of tax cuts, tariffs and other policies which will inevitably put upward pressure on bond yields.
Elsewhere in the financial markets some experts have advised that inflation is trending lower, leading to expectations that the Federal Reserve will reduce rates at the next meeting in November. Others suggest that the sell-off, despite the presidential election, will continue to gain momentum whereby the Federal Reserve will continue to cut rates thereby generating an underlying bid for treasuries. However, the combination of election hedging US debt supply may well see an increased volatility in the US Treasury market.
On Thursday 17th October, The ECB (European Central Bank) cut interest rates by 25 basis points to 3.25%. Analysts advised before the rate cut that financial markets had already factored in a ¼ of 1% interest rate cut as a virtual certainty. Earlier in the day figures from data released showed that headline inflation was below the benchmark target of 2% for the first time since 2021. Interestingly, this was the first back-to-back rate cut for 13 years, with the focus now shifting from bringing inflation down to protecting economic growth. The President of the ECB, Christine Lagarde, has repeated her concerns that there are still risks to growth, but a recession is not on the cards, and confirmed that the Eurozone is still look at a soft landing.
President Lagarde also was quoted as saying that “Lower confidence could prevent consumption and investment from recovering as fast as expected”, also adding “We believe the disinflationary process is well on track, and all the information we have received in the last five weeks was heading in the same direction – down”. Officials went to say that that the outlook for the Eurozone’s economy was on a downward path, with Executive Board member Isabel Schnabel confirming this position by saying “Officials cannot ignore the headwinds to growth”.
Elsewhere, gold hit an all-time record high of USD2,688.82 per ounce with sentiment being lifted by the uncertain outcome of the US Election next month and financial markets forecasting interest rate cuts in the G7, G20 and other economies around the world. In the United Kingdom, data released showed headline inflation below the benchmark target of 2% for the first time since April 2021. The CPI (consumer price index) dropped to 1.7% down from 2.2% recorder in August of this year, with core inflation (does not include figures from the food and energy sectors) dropping quicker than the financial markets predicted.
“Services Inflation”, the one sector the Bank of England always keeps an eye (probably the most important indicator of inflationary pressures in the domestic arena), fell to 4.9%. This is the first time since May 2022 that it has been under 5%. Analysts suggest that that these figures will spur the Bank of England into faster rate cuts. Back in Europe, with data and markets predicting that the German economy is set to shrink for the second consecutive year, and experts suggest that the ECB will cut interest rates by another 25 basis points at their meeting in December 2024 if they are serious about getting growth back on track in the Eurozone’s largest economy.
July and August 2024 witnessed strong gains for gold, with September continuing this trend. Indeed, by the end of September, the month had seen an increase in the gold price of 4.6% to USD2,630 per oz, and witnessed eight new highs, the last one of which was seen on 26th September. However, data released shows a very marginal decline as the month drifted towards its end date.
Gold analysts suggest that the price of gold was pushed higher due to the Federal Reserve’s FOMC (Federal Open Market Committee) dropping interest rates by a somewhat surprising 50 basis points. Analysts suggest another important factor regarding the gains in gold are the increasing geopolitical tensions that are being witnessed, especially in the Middle East and the Russian/Ukrainian war.
On the *ETF (Exchange Traded Funds) front, Global Physically Backed Gold Exchange-Traded Funds witnessed, according to data released, a fifth consecutive month of in-flows. These were recorded at 18.4 metric tons, equivalent to USD1.4 Billion. Data released revealed collective holdings now stand at 3,200 tons, with recent in-flows pushing assets under management to USD270.9 Billion as of close of business 30th September 2024.
*ETFs or Exchange Traded Funds – These are a type of investment fund, but it is also an exchange-traded product which means it is traded on a stock exchange. ETFs buy into and own financial assets such as currencies, bonds, stocks, and commodities such as gold bars. In the case of Physical Gold ETFs they invest directly into gold bullion usually held in a vault. The value of Gold ETFs moves correspondingly with the spot price of gold.
Estimates released by expert analysts showed that in September, global trading volumes rose by 7% month on month to USD259 Million per day, whilst in the OTC* market trading volumes added 10% to USD176 Billion. This year, the gold price has risen 28%, with the Federal Reserve suggesting that there are more interest rate cuts to come. On COMEX**, speculators were seen to increase their total net long position by 6% or 976 tons from August to 30th September, with data showing this to be the highest level since February 2020.
*OTC Market – OTC or Over-The -Counter trading is the process of trading commodities such as gold, stocks, bond, and derivatives without the oversight of a central exchange. OTC trading is different from exchanged based trading where transactions take place on a centralised exchange such as the London Stock Exchange, the Nasdaq, or New Yor Stock Exchange. OTC trading takes place between a network of participants such as brokers banks, and other financial institutions that trade directly (not via an exchange) with each other.
**COMEX – This is the abbreviation for The Commodity Exchange and is the world’s largest options and futures market, where metals such as gold, silver, copper, and aluminium are traded. COMEX is a division of the Chicago Mercantile Exchange Group.
Elsewhere, official data showed that China’s central bank, the PBOC (The People’s Bank of China), refrained for the fifth month in succession in buying gold to increase their reserves, with officials indicating the reason is due to the surge in gold prices. Experts suggest that pauses in new purchases of gold by the PBOC is that they are waiting for a more attractive entry point. On a global basis, central banks were actively buying gold from 2022 – 2023, but data shows they are currently on-track to reduce purchases in 2024.
Experts suggest that with US interest rates due to fall, and the likelihood of continuing global geopolitical pressures, especially those emanating from the Middle East, gold will continue to climb, and perhaps the PBOC would be better off buying now rather than later. With analysts and experts alike currently forecasting gold to rise to in excess of USD3000 per ounce in 2025, investors across the gold markets may well continue to buy, pushing the price even higher.
In an interview on 3rd October 2024, the Governor of the BOE (Bank of England), Andrew Bailey, announced that the Bank could be leaning towards cutting interest rates in a more proactive fashion, providing inflation remained just above the benchmark of 2%. In October 2022, inflation stood at 11.1% due to the energy debacle the United Kingdom faced, but has come down almost to the Bank’s target figure, although the BOE does expect an increase in price growth as energy prices increase throughout the winter months.
Financial markets, after the comments by Governor Bailey, have priced in a 25 basis point interest rate cut to 4.74% at the next meeting of the MPC (Monetary Policy Committee) on Thursday 7th November 2024. With inflation currently standing at 2.2%, AndrewBailey said the BOE could become a “bit more activist” in their approach to reducing interest rates providing the news on the pace of price rises continued to be good. The current remarks from Governor Bailey are in contradiction of the “steady as she goes” policy since the first rate cut before the beginning of the Covid-19 pandemic.
The markets continue to worry about the continuing conflicts in the middle east which could indeed drive the cost of a barrel of oil back up to USD100, which could well push up inflation. Oil prices have risen by 3% on concerns of increasing conflict in the Middle East, however Governor Bailey was quick to point out that a year ago, on the 7th of October 2023, Hamas launched their first attack on Israel there had been no significant rise in oil prices.
On the back of Governor Bailey’s remarks, the appeal of Sterling (British Pound) has slumped as financial markets had originally placed bets on quicker reduction in interest rates. The Governors remarks had a big impact on the financial markets as they were on board with his “steady as you go” policy, suggesting that the BOE would lag behind the Federal Reserve and the ECB (European Central Bank) in cutting interest rates. In fact, traders and investors had piled into bullish bets on sterling, taking advantage of various rate differentials. Data issued by the Commodities Futures Trading Commission show hedge fund wagers at their highest since 2018.
A number of financial experts are suggesting that the pounds best days are over with its rally coming to an end. The pound fell against the US Dollar by 1.1% to 1.3118, the biggest fall since March 2023, and the pound also fell by 1.1% against the Euro the most (on a closing basis) since December 2022. Governor Baileys’ remarks has certainly caught traders by surprise with many selling sterling to close out bullish positions.
On 18th September 2024 the Federal Reserve cut interest rates by 50 basis points: an aggressive start to bring interest rates down in the United States. After more than twelve months, the FOMC voted by 11 to 1 to lower the federal funds rate to a range of 4.75% – 5%, reflecting the first interest rate cut in over four years. Whilst the markets are expecting further rate cuts this year, projections released by the Federal Reserve regarding the same showed that there was a narrow majority of 10 to 9 in favour of further cuts in 2024.
Following the announcement, the Federal Reserve Chairman Jerome Powell was quoted in a press conference as saying, “This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labour market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%”. Whilst inflation is indeed moving downwards, analysts suggested that the Chairmans press conference was economic speak for “we are still not sure about the labour market”.
However, Chairman Powell did caution the markets not to take this rate cut as a confirmation that the Federal Reserve has now set the pace at which rate cuts will be considered in the future. As usual, any further rate was tempered with a statement from policymakers that “they will consider additional adjustments to rates based on incoming data, the evolving outlook and balance of risks”. Further tempering was added when policymakers also advised that jog gains have slowed, and inflation remains slightly elevated.
Despite these somewhat negative announcements regarding future interest rate cuts, the financial markets have taken the opposite view with traders ramping up their bets on future interest rate cuts and pricing in a further 70 basis points of rate cuts between now and the end of Q4. Experts suggest that the pace of rate cuts will be as the market predicts, as previously traders have done a relatively good job of predicting the amount and early pace of the cuts. Indeed, despite negative rhetoric, including the warning that ‘the outlook for the world’s largest economy was uncertain’, the ‘Dot Plot’* published by the Federal Reserve indicates that interest rate could be cut by another 50 basis points by the end of Q4, and a further full 1% cut in 2025.
*Dot Plot – This is a graphical display consisting of data points which the Federal Reserve uses to predict interest rates. The graphs display quantitative variables where each dot represents a value.
On September 19th, 2024, and despite a full 50 basis point reduction in US interest rates announced by the Federal Reserve the day before, the Bank of England, (BOE) advised they were holding interest rates steady at 5%, with the MPC (Monetary Policy Committee) voting by 8 – 1 to keep the cost of borrowing steady. Whilst many experts, investors and analysts expected a hold on interest rates, the word coming out of the BOE was that they are waiting on further data to confirm inflationary pressures have subsided before making a second cut in the cost of borrowing. The decision also pushed sterling to its strongest level against the US Dollar since March 2022, and is just a hair’s breadth away from its two year high against the Euro.
I think we are on a gradual path down. That is the good news.
Andrew Bailey, BOE Governor
In a statement by the BOE Governor Andrew Bailey he said “We should be able to reduce rates gradually over time, it is vital that inflation stays low, so we need to be careful not to cut too fast or by too much.” Later on the Governor was also quoted as saying “I think we are on a gradual path down. That is the good news. I think interest rates are going to come down. I am optimistic on that front, but we do need to see some more evidence. We need to see that sort of residual element now fully taken out, to keep inflation sustainably at the 2% target.”
Released minutes of the MPC meeting said, “In the absence of material developments, a gradual approach to removing policy restraints remains appropriate.” The minutes also reiterated the need for policy to remain ‘restrictive for sufficiently long’ and that the MPC will take a meeting-by-meeting approach to interest rates. This gradual approach comes despite recently released data showing August inflation at 2.2% (below the BOE’s forecast of 2.4%), however, service inflation remains sticky at an uncomfortable high of 5.6%. Some experts are suggesting that service inflation may well hamper any further rate cuts this year, but they are definitely in the minority.
Experts advise the general feeling in the financial markets is that at the next policy meeting of the MPC on November 7th, a rate cut is almost a racing certainty, especially as inflation is below the BOE’s expectation. However, the BOE have warned that they expect headline inflation to increase to 2.5% by the end of Q4 this year. Elsewhere, interest rates were held steady in Japan, China , Taiwan, and Turkey, whilst Oman and South Africa both cut interest rates.
For the second time in 2024 the ECB (European Central Bank) has cut interest rates by a ¼ of 1% (25 basis points) as inflation recedes towards their target of 2%. The key deposit rate was cut, as expected by most financial experts, to 3.5% despite the recovery facing some economic headwinds. Additionally, the refinancing rate (or minimum bid rate, is the interest rate which banks have to pay when borrowing money from the ECB) was cut by a full 60 basis points to 3.65%, a technical adjustment which had been on the cards for quite a while.
The ECB President Christine Lagarde, like her peers in the United Kingdom and the United States, was quoted as saying “we shall remain data-dependent” and going on to add that the decision to cut interest rates was totally unanimous. The President was further quoted as saying “A declining path is not predetermined, neither in terms of sequence, nor in terms of volume”. A number of analysts surmised that this is financial speak for ‘We may or may not be doing another rate cut this year and we are therefore not going to commit ourselves.’ Financial markets slightly eased back on bets on further monetary easing predicting a total, predicting a circa 36 basis points increase by the end of Q4, though there is no complete consensus.
The interest rate announcement by the ECB follows a fall in inflation in August to 2.2% with data released showing wage increases which drive price increases in the service sector are now on the decline. A comprehensive measure of workers’ pay, the “Compensation Per Employee”, provided data showing an easing to 4.3% in Q2 from 4.8% in Q1. The ECB President stressed that their inflation target of 2% should be reached by the end of Q4 2025. However, as in a number of other economies, service inflation is still on the radar as being one of the main concerns.
Despite the sluggish growth in the euro zone’s 20- nation economy, where declining momentum from earlier in the year (households are not supporting the rebound in Q1 and figures for manufacturers remain indifferent), many analysts suggest that there is a predictable outlook to interest rate cuts. Whilst many analysts see an interest rate cut in each of the upcoming quarters until end of Q4 2025, there are some doubts due to the weak economy, which is the justification for the ECB remaining on the fence regarding the timing of future rate cuts.
In the past two months the US Dollar has declined 5% against major currencies (the US Dollar index currently stands at a 13 month low) suggesting that increase in the value of the dollar in the years after the Covid-19 Pandemic has come to end. Analysts suggest that this is not too surprising because the rhetoric coming out of the Federal Reserve has recently softened regarding interest rates. Indeed, the Chairman of the Federal Reserve, Jerome Powell, made it plain at the Jackson Hole Economic Symposium (20th – 22nd August 2024) that inflation was, in fact, receding. Chairman Powell went on to say “Inflation is on what increasingly appears to be a sustainable path to our 2% objective”.
The big question at the moment is not if, but by how much the Federal Reserve will cut interest rates at their next meeting on September 18th, 2024, and will sustained cuts in interest rates erode the dollar haven that the United States has enjoyed for the last three years? Analysts suggest that according to bond market pricing* financial markets can expect a 0.25% reduction in interest rates at the September Federal Reserve meeting. However, there are those in the market who suggest that the Federal Reserve could indeed cut rates by a full half percentage point.
*Correlation Between Interest Rates and Bond Prices – The relationship between interest rates and bond prices are such that when interest rates fall bond prices rise and when interest rates rise bond prices fall. Thus when existing bonds have a lower interest rate than current interest rates they are less desirable, so as the interest rate on the US Dollar falls, so bonds become more attractive and their price rises.
What effect will the declining value of the US Dollar have on emerging markets, exporters of commodities, and the rest of the world? As the dollar declines due to interest rate cuts some analysts are questioning whether the status as global reserve currency will be affected. Experts agree that the reserve currency status will not be threatened by a declining US Dollar as the United States is still the safest place to invest with buoyant stock markets and decent yields. However funds that are domiciled in the United States may look outside its borders as investment opportunities open up in other parts of the world.
Elsewhere, countries whose economies rely on the exports of commodities will usually reap the benefit of a falling US Dollar, as the commodity price correlation usually moves inversely to that of the US Dollar. Emerging markets that have not had the best of times in recent years should broadly benefit, especially those resource-poor markets (Inc India and China) who rely on the importation of commodities denominated in US Dollars. The US Dollar has lost ground against the G-10 currencies, the largest of which is within the European Union and specifically the Federal Republic of Germany, where a stronger Euro will only increase the pain of weakening capital expenditure and consumer confidence.
The odds are very good for the Federal Reserve to cut interest rates at their September meeting. However, Chairman Powell always hedges his bets by reminding the financial community that their decisions are always data driven. He reminded us at Jackson Hole, with the upside of beating inflation against the downside of labour market concerns (which had cooled substantially with unemployment rising to 4.3%), future actions would depend on incoming data and the balance of risks.
