Festive Figures - Wrapping Up the UK's Year-End Inflation Trends

Welcome to our weekly newsletter, where we summarise the key market developments over the last seven days. This will be the final Weekly Market Update for the year.

Spotlight: 12 investment facts to celebrate the 12 days of Christmas

1. A period of high rates can often be followed by negative market movements.

This is because as interest rates increase, borrowing costs increase and this acts as a contractionary movement for the economy. The chart below shows over the past 40 years, a rise in US Treasury yields has often been followed by a financial incident, with the most recent being the 2018 global selloff. Interest rates tend to fall in a period of negative growth as inflation typically slows and central banks move to more supportive monetary policy (Source: Factset). 

 

2. If California were a country, it would have the fifth highest GDP in the world

(Source: Bull Oak Capital)
 
The United States is the world's largest economy, made up of 50 economically diverse states. Some of those states have large enough economies on their own that they'd rank pretty high on their own, especially California. If the Golden State were its own nation, the economy would be the fifth largest in world, surpassing the United Kingdom's GDP last year. With a gross domestic product of $2.747 trillion, California would only trail Germany, Japan, China, and the US as a whole. Texas and New York are massive on their own, as well, ranking No. 11 and No. 13 worldwide, respectively.
 

3. The US spends more on defence than the next seven nations combined

(Source: PGPF)

The United States isn't likely to drop from the top of list of national defence spending. The US spends more on defence than the next seven nations combined. At $610 billion annually, the US outspends the $578 billion combined spending of China, Russia, Saudi Arabia, India, France, United Kingdom and Japan. That $610 billion is good for 15% of all federal spending.

 
4. The proportion of assets held in cash vs investment products

The UK Financial Conduct Authority Financial Lives Survey 2022 suggests that a considerable proportion of affluent investors are holding larger amounts of cash than they need. These investors could make their money work harder by actively engaging with their finances and considering investment opportunities. For instance, in 2022, nearly 60% of adults with investible assets of £10,000 or more, kept either all or most of these assets in cash (Source: FCA).

5. Financial disparity between men and women: AJ Bell's Money Matters survey reveals a significant financial disparity between men and women.

The survey highlights that men possess £1.65 trillion more in total savings and investments when considering various assets like cash savings, pensions, and investment accounts. The survey particularly emphasizes the substantial gap in pensions and investments, where women's average pension savings are 35% lower than men's, amounting to a £1.26 trillion gap (Source: AJ Bell).

 
6. Size of the US national debt: The US Government collects around $2.5 trillion per year in personal income taxes.

Of that, about $1 trillion per year (40%) is being consumed by interest on the national debt (Independent Institute).

 
7. There has been a gold “Santa” rally every December since 2017 (average monthly gain every December nearly 4%).

(Syz Group)
 

8. Ireland has experienced unprecedented growth in prosperity in recent years.

GDP per capita is now almost $100k, which is more than twice as much in Germany and three times as much in Italy (Source: Bloomberg).

9. The Magnificent 7 make up more of MSCI ACWI than Japan, UK, China, France, and now almost Canada too, combined.

If you invested $10,000 in each of the magnificent 7 stocks at the time when the last of them (Facebook) went public in May 2012 (including dividends) you would have $3.6m, with NVIDIA alone returning $1.7m (Source: Bank of America, Syz Group).

10. India’s stock market hit a $4 trillion market cap for the first time this December, making it the 5th largest stock market in the world

(Source: Bloomberg).

 
11. 97% of all Bitcoin will be mined by April of 2024 (Syz Group). 

Bitcoin mining is the process by which new bitcoins are created and transactions are added to the blockchain, involving miners solving complex mathematical problems to validate and secure the network.

 
12. In 1950 the world emitted 6 billion tonnes of CO2.

By 1990, this had almost quadrupled, reaching more than 22 billion tonnes. Emissions have continued to grow rapidly, and we now emit over 34 billion tonnes each year. (Source: Our World In Data). Asia is by far the largest CO2 emitting continent in the world, accounting for 63% of global emissions. China is the world’s largest emitter: it emits nearly 10 billion tonnes each year, more than ¼ of global emissions (Source: Our World In Data).

The Noise

• UK house prices fell by 1.2% in the 12 months to October, per the Office for National Statistics on Wednesday. This is the biggest annual fall since October 2011, as the house market feels the hit from higher borrowing costs. As mentioned last week, the Bank of England kept interest rates at a 15-year high of 5.25%, which has made mortgages more expensive for prospective buyers while making saving more attractive. It has also forced some homeowners to sell as they’re no longer able to afford these higher mortgage repayments. These three factors have together resulted in increased supply of homes for sale and reduced demand.

• Market volatility was notably calm over 2023, a remarkable contrast to last year. The Chicago Board Option Exchange’s Volatility Index (VIX), a commonly used measure for market volatility, fell to four-year lows in December this year. This followed the US Federal Reserve’s indication that it would be cutting interest rates in 2024.  Moderating inflation, solid consumer spending in the US and labour market strength kept investors calm through the year leading volatility to fall, however there were a few notable spikes. The US regional banking crisis in March and growing conflict in the Middle East in October were two noteworthy events that caused volatility to jump. While volatility could stay low in 2024, any number of unforeseen events could take place and lead to turbulent markets. This emphasises the importance of being fully invested in markets through all stages of the economic cycle. Research from JP Morgan has shown that an investment from 2003 to 2022 in the S&P 500 index missing just the 10 best days would lose out on more than 50% of their return potential.

• The International Energy Agency (IEA) reports that global coal consumption reached a record high in 2022, surging by 4% year-on-year to 8.42 billion tonnes (Bt) amid the global energy crisis. Asia, particularly China, India, and Indonesia, drove this growth in both power and non-power sectors. However, the United States witnessed an 8% decline, and Europe's 4.3% increase in consumption was tempered by factors like a weak economy and a mild winter. In 2023, the IEA anticipates a decline in coal demand in most advanced economies, with the European Union and the United States expected to experience record annual declines of around 20%. Despite this, robust growth in China, India, Indonesia, Vietnam, and the Philippines is projected to offset these decreases globally, leading to a projected new record of 8.54 Bt in coal demand. The report forecasts a subsequent decline in global coal demand by 2.3% in 2026 from 2023 levels, with China playing a pivotal role. It also emphasises a shift in coal dominance towards Asia, with China and India projected to collectively account for over 70% of global coal consumption by 2026, presenting challenges for international dialogue on climate goals. Despite this, the IEA anticipates a decline in coal trade volumes after reaching record levels in 2023, and thermal coal prices are retreating from their 2021 and 2022 highs.
   

​The Numbers

​The Nuance

Christmas came early for British Prime Minister Rishi Sunak and Chancellor Jeremy Hunt as the latest inflation data published this week showed UK inflation fell to 3.9% year-on-year in November. This the lowest reading for UK inflation since September 2021. The big drop from 4.6% in October came in well below economist estimates of 4.4%, pushed down by cheaper petrol and a much smaller monthly rise in food and drink prices.

Investors have now moved to fully price in a Bank of England rate cut by May 2024, and now see an almost 50% chance of a cut by March. Resultantly, this downward adjustment to UK interest rate expectations has seen the pound lose value relative to the US dollar.

UK Inflation has come a long way since the start of 2023. The first reading of the year was an eye-watering 10.1% in January, and though the reading for November is much closer to the Bank of England’s 2% target, there is still a ways to go. The almost 21% rise in consumer prices since 2020 is more than any other Group of Seven advanced economy, and energy prices and borrowing costs remain high. Nevertheless, market watchers believe this provides strong evidence that disinflationary pressures are building in the UK, and the latest core CPI data also supports this thesis.

Core CPI (excluding energy and food prices) is another key measure of inflation watched by the Bank of England, and it experienced a sharp drop in November as well. It fell to 5.1% from 5.7%, well below forecasts of 5.6% and now materially below the Bank of England’s expectations in their last November Monetary Policy Report.

Going into 2024, market participants are expecting the Bank of England to start reducing rates in the first half of the year, though it will be important to see how the BoE react to changes in markets or inflation.

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.