Weekly market update- week ending 07/10/22

It was Harold Wilson who famously said that “a week is a long time in politics”. This seems very relevant in the current times as the fallout from the mini/maxi budget continues. Having received a bemused reaction from most corners of the political spectrum when announced, the government this week revealed the rollback of the proposed removal of the 45% additional rate of tax. Whilst the policy cost relative to the other tax cuts proposed would have been small, it seemed a strange message to signal at a time when many are struggling in the face of a rising cost of living.

Chancellor Kwasi Kwarteng has confirmed (for now) that the government will keep to the 23rd November date for the publication of his fiscal plan. There was speculation from inside his own government that this could be brought forward to coincide with the Bank of England’s next meeting on the 3rd November. There is a range of opinions in the market about the size of the interest rate increase expected at that meeting, with estimates ranging from 1-2%. The Federal Reserve will meet the day before the BoE with market expectations forecasting a further 0.75% increase.

Investment markets in general were broadly positive this week. In the UK, some stability returned to sectors of the market very sensitive to rises in the risk-free rate (gilts). Across the pond, having fallen 9% in September, the S&P 500 saw its biggest 2-day gain since 2020 on Monday and Tuesday. While we wait for more certainty that inflation has peaked, we expect volatility to remain high. Sentiment in the market is likely to change quickly once the Fed indicates that interest rates are high enough, but that won’t happen until they can be confident that inflation is returning towards target levels.