January 25 2023 | Team nudge
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This article is written by Simon Miller, who has over 20 years’ experience in financial journalism and is currently the Senior Financial Editor at nudge. US gives thanks for worsening data.
Just before Thanksgiving, US markets enjoyed a boost as they digested the latest American economic data before tucking into their turkey. The latest figures pointed to a significant slowing in the US economy and, coupled with the minutes from the Fed’s last interest rate decision meeting, led to investors bolstering Wall Street with other markets following.
US consumer sentiment fell in November to 56.8 and remained depressed as worries about high inflation and an impending recession heightened. In addition, S&P Global’s US Composite PMI Output Index, which tracks the manufacturing and services sectors, fell to 46.3 from 48.2 in October. Meanwhile, the Fed minutes pointed to a drop in the increase of interest rates in the States. The minutes said: “A substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate."
As a result, the pound lifted against the dollar while markets rallied. But why is this? Surely bad news shouldn’t lead to market uplifts? There are two factors at work here – inflation and recession. The boom in markets was, in part, driven by low interest rates and quantitative easing. Both lead to more money sloshing around the system, meaning riskier assets such as tech stocks could be punted on. However, the Fed’s aggressive stance on inflation means that as interest rates rise, money becomes less available and more expensive.
So, markets should have reacted accordingly. But, coupled with that is the looming recession. As the US and Europe head into recession, this is being priced in so markets aren’t reacting in surprise to contraction data. Simply put, the market is not shocked by the news so is steadier in its trading. Slower growth brings fewer inflationary pressures which, in turn, should lead to smaller, and fewer, rate hikes.
It is good news for the UK as well. With interest rate rises potentially easing in the States, that backbone for a strong dollar becomes weaker. So as the pound rises against the dollar, so the cost of commodities - which are generally priced in dollars – as well as other imported goods become cheaper, pushing down one of the major influences on UK inflation. Sterling has almost regained 20 cents since its record low after the chaos of the mini-budget in September but is still down 10% against the dollar this year.
So, there you have it. Markets do not necessarily react badly to bad news. Sometimes, they see the silver lining in any cloud – although following the markets, perhaps that should be the gold lining?
But what does that mean for personal finances? If the markets don’t necessarily react badly to bad news, how should the individual react? The key, as always, is to look at your targets, look at your circumstances and consider how you want your money to work for you.
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